e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-32599
WILLIAMS PARTNERS L.P.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE
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20-2485124 |
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(State or other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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ONE WILLIAMS CENTER |
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TULSA, OKLAHOMA
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74172-0172 |
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(Address of principal executive offices)
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(Zip Code) |
(918) 573-2000
(Registrants telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The registrant had 14,598,276 common units and 7,000,000 subordinated units outstanding as of
November 1, 2006.
WILLIAMS PARTNERS L.P.
INDEX
FORWARD-LOOKING STATEMENTS
Certain matters contained in this report include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements discuss our expected future results based on
current and pending business operations.
All statements, other than statements of historical facts, included in this report which
address activities, events or developments that we expect, believe or anticipate will exist or may
occur in the future, are forward-looking statements. Forward-looking statements can be identified
by various forms of words such as anticipates, believes, could, may, should, continues,
estimates, expects, forecasts, might, planned, potential, projects, scheduled or
similar expressions. These forward-looking statements include, among others, statements regarding:
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amounts and nature of future capital expenditures; |
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expansion and growth of our business and operations; |
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business strategy; |
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cash flow from operations; |
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seasonality of certain business segments; and |
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natural gas liquids and gas prices and demand. |
1
Forward-looking statements are based on numerous assumptions, uncertainties and risks that
could cause future events or results to be materially different from those stated or implied in
this document. Many of the factors that will determine these results are
beyond our ability to control or predict. Specific factors which could cause actual results to
differ from those in the forward-looking statements include:
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We may not have sufficient cash from operations to enable us to pay the minimum
quarterly distribution following establishment of cash reserves and payment of fees and
expenses, including payments to our general partner. |
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Because of the natural decline in production from existing wells and competitive
factors, the success of our gathering and transportation businesses depends on our ability
to connect new sources of natural gas supply, which is dependent on factors beyond our
control. Any decrease in supplies of natural gas could adversely affect our business and
operating results. |
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Our processing, fractionation and storage businesses could be affected by any decrease
in the price of natural gas liquids or a change in the price of natural gas liquids
relative to the price of natural gas. |
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Lower natural gas and oil prices could adversely affect our fractionation and storage
businesses. |
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We depend on certain key customers and producers for a significant portion of our
revenues and supply of natural gas and natural gas liquids. The loss of any of these key
customers or producers could result in a decline in our revenues and cash available to pay
distributions. |
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If third-party pipelines and other facilities interconnected to our pipelines and
facilities become unavailable to transport natural gas and natural gas liquids or to treat
natural gas, our revenues and cash available to pay distributions could be adversely
affected. |
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Our future financial and operating flexibility may be adversely affected by restrictions
in our indenture and by our leverage. |
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Williams credit agreement and Williams public indentures contain financial and
operating restrictions that may limit our access to credit. In addition, our ability to
obtain credit in the future will be affected by Williams credit ratings. |
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Our general partner and its affiliates have conflicts of interest and limited fiduciary
duties, which may permit them to favor their own interests to the detriment of our
unitholders. |
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Our partnership agreement limits our general partners fiduciary duties to our
unitholders and restricts the remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of fiduciary duty. |
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Even if unitholders are dissatisfied, they cannot currently remove our general partner without its consent. |
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You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us. |
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Our operations are subject to operational hazards and unforeseen interruptions for which
we may or may not be adequately insured. |
Given the uncertainties and risk factors that could cause our actual results to differ
materially from those contained in any forward-looking statement, we caution investors not to
unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to
update the above list or to announce publicly the result of any revisions to any of the
forward-looking statements to reflect future events or developments.
Because forward-looking statements involve risks and uncertainties, we caution that there are
important factors, in addition to those listed above, that may cause actual results to differ
materially from those contained in the forward-looking statements. For a detailed discussion of
those factors, see Part I, Item IA Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2005, and Item 1A of Part II, Risk Factors, of this report.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per-unit amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005* |
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2006 |
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2005* |
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Revenues: |
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Storage |
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$ |
6,581 |
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$ |
5,409 |
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$ |
17,610 |
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$ |
14,435 |
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Fractionation |
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2,708 |
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2,386 |
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9,650 |
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7,123 |
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Gathering |
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632 |
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649 |
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2,041 |
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2,295 |
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Product sales: |
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Affiliate |
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2,920 |
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2,726 |
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11,963 |
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9,234 |
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Third-party |
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63 |
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Other |
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1,138 |
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1,006 |
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3,170 |
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2,571 |
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Total revenues |
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13,979 |
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12,176 |
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44,434 |
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35,721 |
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Costs and expenses: |
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Operating and maintenance expense (excluding depreciation): |
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Affiliate |
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3,658 |
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2,592 |
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11,041 |
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7,938 |
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Third-party |
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3,961 |
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5,680 |
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11,312 |
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8,854 |
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Product cost |
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2,880 |
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2,258 |
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11,522 |
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8,320 |
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Depreciation and accretion |
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909 |
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896 |
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2,709 |
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2,694 |
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General and administrative expense: |
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Affiliate |
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1,652 |
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1,170 |
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4,593 |
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2,708 |
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Third-party |
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562 |
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385 |
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1,690 |
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431 |
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Taxes other than income |
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182 |
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194 |
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550 |
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532 |
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Other expense |
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5 |
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Total costs and expenses |
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13,804 |
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13,175 |
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43,422 |
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31,477 |
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Operating income (loss) |
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175 |
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(999 |
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1,012 |
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4,244 |
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Equity earnings-Williams Four Corners |
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10,538 |
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8,565 |
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26,842 |
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21,795 |
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Equity earnings-Discovery Producer Services |
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4,055 |
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66 |
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10,183 |
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2,969 |
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Interest expense: |
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Affiliate |
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(15 |
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(1,822 |
) |
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(45 |
) |
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(7,439 |
) |
Third-party |
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|
(3,256 |
) |
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(192 |
) |
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(4,110 |
) |
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(561 |
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Interest income |
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462 |
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76 |
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642 |
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|
76 |
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Net income |
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$ |
11,959 |
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$ |
5,694 |
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$ |
34,524 |
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$ |
21,084 |
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Allocation of net income: |
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Net income |
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11,959 |
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|
|
5,694 |
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|
34,524 |
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|
21,084 |
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Allocation of net income (loss) to general partner |
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(622 |
) |
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|
5,950 |
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|
13,249 |
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21,340 |
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Allocation of net income (loss) to limited partners |
|
$ |
12,581 |
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$ |
(256 |
) |
|
$ |
21,275 |
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$ |
(256 |
) |
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Basic and diluted net income (loss) per limited partner unit: |
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Common units |
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$ |
0.58 |
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|
$ |
(0.02 |
) |
|
$ |
1.19 |
|
|
$ |
(0.02 |
) |
Subordinated units |
|
|
0.58 |
|
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|
(0.02 |
) |
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|
1.19 |
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(0.02 |
) |
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Weighted average number of units outstanding: |
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Common units |
|
|
14,597,072 |
|
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|
7,000,000 |
|
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|
9,870,084 |
|
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|
7,000,000 |
|
Subordinated units |
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|
7,000,000 |
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|
7,000,000 |
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|
7,000,000 |
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|
7,000,000 |
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* |
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Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
3
WILLIAMS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
|
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September 30, |
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|
December 31, |
|
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|
2006 |
|
|
2005* |
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(Unaudited) |
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(Thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
32,150 |
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$ |
6,839 |
|
Accounts receivable: |
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Trade |
|
|
2,483 |
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|
1,840 |
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Other |
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|
3,124 |
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|
|
2,104 |
|
Gas purchase contract affiliate |
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|
4,888 |
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|
5,320 |
|
Product imbalance |
|
|
428 |
|
|
|
760 |
|
Prepaid expense |
|
|
2,133 |
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|
1,133 |
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Other current assets |
|
|
628 |
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Total current assets |
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|
45,834 |
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|
17,996 |
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Investment in Williams Four Corners |
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|
157,874 |
|
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|
152,003 |
|
Investment in Discovery Producer Services |
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|
148,443 |
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|
150,260 |
|
Property, plant and equipment, net |
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|
69,280 |
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|
67,931 |
|
Gas purchase contract noncurrent affiliate |
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|
1,188 |
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|
4,754 |
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Other |
|
|
2,327 |
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|
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|
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Total assets |
|
$ |
424,946 |
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|
$ |
392,944 |
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LIABILITIES AND PARTNERS CAPITAL |
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Current liabilities: |
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|
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Accounts payable: |
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|
|
|
|
|
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Trade |
|
$ |
4,459 |
|
|
$ |
3,906 |
|
Affiliate |
|
|
2,167 |
|
|
|
4,729 |
|
Deferred revenue |
|
|
6,818 |
|
|
|
3,552 |
|
Accrued liabilities |
|
|
5,507 |
|
|
|
2,373 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,951 |
|
|
|
14,560 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
150,000 |
|
|
|
|
|
Environmental remediation liabilities |
|
|
3,964 |
|
|
|
3,964 |
|
Other noncurrent liabilities |
|
|
769 |
|
|
|
762 |
|
Commitments and contingent liabilities (Note 7)
|
|
|
|
|
|
|
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Partners capital |
|
|
251,262 |
|
|
|
373,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital |
|
$ |
424,946 |
|
|
$ |
392,944 |
|
|
|
|
|
|
|
|
|
|
|
* |
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Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
4
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005* |
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|
|
(Thousands) |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
34,524 |
|
|
$ |
21,084 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
2,709 |
|
|
|
2,694 |
|
Amortization of gas purchase contract affiliate |
|
|
3,998 |
|
|
|
581 |
|
Distributions in excess of/(undistributed) equity earnings of: |
|
|
|
|
|
|
|
|
Discovery Producer Services |
|
|
1,817 |
|
|
|
(2,969 |
) |
Williams Four Corners |
|
|
(17,132 |
) |
|
|
(21,795 |
) |
Cash provided (used) by changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,663 |
) |
|
|
(2,538 |
) |
Prepaid expense |
|
|
(1,000 |
) |
|
|
(126 |
) |
Accounts payable |
|
|
(2,135 |
) |
|
|
3,685 |
|
Accrued liabilities |
|
|
3,219 |
|
|
|
45 |
|
Deferred revenue |
|
|
3,266 |
|
|
|
3,571 |
|
Other, including changes in non-current liabilities |
|
|
706 |
|
|
|
3,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
28,309 |
|
|
|
7,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of equity investment |
|
|
(156,129 |
) |
|
|
|
|
Capital expenditures |
|
|
(4,009 |
) |
|
|
(1,860 |
) |
Contribution to Discovery Producer Services LLC |
|
|
|
|
|
|
(24,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(160,138 |
) |
|
|
(26,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of common units |
|
|
227,107 |
|
|
|
100,247 |
|
Proceeds from debt issuance |
|
|
150,000 |
|
|
|
|
|
Excess purchase price over contributed basis of equity
investment |
|
|
(203,871 |
) |
|
|
|
|
Distributions to unitholders |
|
|
(19,875 |
) |
|
|
|
|
Distributions to The Williams Companies, Inc |
|
|
|
|
|
|
(58,756 |
) |
Payment of debt issuance costs |
|
|
(3,138 |
) |
|
|
|
|
Payment of offering costs |
|
|
(2,168 |
) |
|
|
(4,291 |
) |
General partner contributions |
|
|
4,841 |
|
|
|
|
|
Contributions per omnibus agreement |
|
|
4,244 |
|
|
|
|
|
Changes in advances from affiliates net |
|
|
|
|
|
|
(3,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
157,140 |
|
|
|
33,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
25,311 |
|
|
|
14,482 |
|
Cash and cash equivalents at beginning of period |
|
|
6,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
32,150 |
|
|
$ |
14,482 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
5
WILLIAMS PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Limited Partners |
|
|
General |
|
|
Partners |
|
|
|
Common |
|
|
Subordinated |
|
|
Partner |
|
|
Capital |
|
|
|
(Thousands) |
|
Balance January 1, 2006* |
|
$ |
108,526 |
|
|
$ |
108,491 |
|
|
$ |
156,641 |
|
|
$ |
373,658 |
|
Net income |
|
|
13,410 |
|
|
|
8,385 |
|
|
|
12,729 |
|
|
|
34,524 |
|
Cash distributions |
|
|
(11,318 |
) |
|
|
(8,085 |
) |
|
|
(472 |
) |
|
|
(19,875 |
) |
Contributions pursuant to the omnibus agreement |
|
|
|
|
|
|
|
|
|
|
4,244 |
|
|
|
4,244 |
|
Issuance of units to public
(7,590,000 common units) |
|
|
227,107 |
|
|
|
|
|
|
|
|
|
|
|
227,107 |
|
Contributions from general partner |
|
|
|
|
|
|
|
|
|
|
4,841 |
|
|
|
4,841 |
|
Distribution to general partner in exchange for
interest in Williams Four Corners |
|
|
|
|
|
|
|
|
|
|
(360,000 |
) |
|
|
(360,000 |
) |
Adjustment in basis of investment in Williams
Four Corners |
|
|
|
|
|
|
|
|
|
|
(11,261 |
) |
|
|
(11,261 |
) |
Offering costs |
|
|
(2,168 |
) |
|
|
|
|
|
|
|
|
|
|
(2,168 |
) |
Other |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2006 |
|
$ |
335,749 |
|
|
$ |
108,791 |
|
|
$ |
(193,278 |
) |
|
$ |
251,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Restated as discussed in Note 1. |
See accompanying notes to consolidated financial statements.
6
WILLIAMS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Basis of Presentation
Unless the context clearly indicates otherwise, references in this quarterly report to we,
our, us or like terms refer to Williams Partners L.P. and its subsidiaries. Unless the context
clearly indicates otherwise, references to we, our, and us include the operations of
Discovery Producer Services LLC (Discovery) and Williams Four Corners LLC (Four Corners), in
which we own a 40 percent and 25.1 percent interest, respectively. When we refer to Discovery by
name, we are referring exclusively to its businesses and operations. When we refer to Four Corners
by name, we are referring exclusively to its businesses and operations.
We are a Delaware limited partnership formed by The Williams Companies, Inc. (Williams) in
February 2005. On August 23, 2005, we completed our initial public offering (IPO) of common
units. Effective with the IPO, we owned (1) a 40 percent interest in Discovery; (2) the Carbonate
Trend gathering pipeline off the coast of Alabama; (3) three integrated natural gas liquids (NGL)
product storage facilities near Conway, Kansas; and (4) a 50 percent undivided ownership interest
in a fractionator near Conway, Kansas.
Williams Partners GP LLC, a Delaware limited liability company and an indirect wholly owned
subsidiary of Williams, serves as our general partner and owns all of our two percent general
partner interest. All of our activities are conducted through Williams Partners Operating LLC
(Williams OLLC), an operating limited liability company wholly owned by us.
On June 20, 2006, we acquired a 25.1 percent membership interest in Four Corners pursuant to
an agreement with Williams Energy Services, LLC, Williams Field Services Group, LLC, Williams Field
Services Company, LLC (WFSC), Williams OLLC and our general partner for aggregate consideration
of $360.0 million (See Note 3-Acquisition of 25.1 Percent Interest in Four Corners). Prior to
closing, WFSC contributed to Four Corners its natural gas gathering, processing and treating assets
in the San Juan Basin in New Mexico and Colorado. Because Four Corners was an affiliate of Williams
at the time of the acquisition, the transaction was between entities under common control, and has
been accounted for at historical cost. Accordingly, our consolidated financial statements and
notes have been restated to reflect the combined historical results of our investment in Four
Corners throughout the periods presented.
We financed this acquisition with a combination of equity and debt. On June 20, 2006, we
issued 6,600,000 common units at a price of $31.25 per unit. Additionally, at the closing, the
underwriters fully exercised their option to purchase 990,000 common units at a price of $31.25 per
unit. This offering yielded net proceeds of $227.1 million after the payment of underwriting
discounts and commissions of $10.1 million, but before the payment of other offering expenses. On
June 20, 2006, we also issued $150.0 million aggregate principal of unsecured 7.5 percent Senior
Notes due 2011 under a private placement debt agreement (See Note 6-Credit Facilities and Long-Term
Debt). Proceeds from this issuance totaled $146.9 million (net of $3.1 million of related
expenses).
The accompanying interim consolidated financial statements do not include all the notes in our
annual financial statements and, therefore, should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Form 8-K, filed September 22,
2006, for the year ended December 31, 2005. The accompanying consolidated financial statements
include all normal recurring adjustments that, in the opinion of management, are necessary to
present fairly our financial position at September 30, 2006, and results of operations for the
three months and nine months ended September 30, 2006 and 2005 and cash flows for the nine months
ended September 30, 2006 and 2005. All intercompany transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in our Consolidated Financial Statements and accompanying notes. Actual results
could differ from those estimates.
7
Note 2. Recent Accounting Standards
In January 2006, Williams adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment. Accordingly, payroll costs reflect additional compensation costs related to
the adoption of this accounting standard. These costs relate to Williams common stock equity
awards made between Williams and its employees. The adoption of this Statement beginning in the
first quarter of 2006 had no material impact on our Consolidated Financial Statements.
Note 3. Acquisition of 25.1 Percent Interest in Four Corners
Because Four Corners was an affiliate of Williams at the time of our 25.1 percent interest
acquisition, the transaction was between entities under common control, and has been accounted for
at historical cost. As a result of recording the Four Corners investment at historical cost while
acquiring the interest in Four Corners at market value, our general partners capital account was
decreased by $203.9 million which represents the difference between the historical cost and market
value of Four Corners. The acquisition had no impact on earnings per unit as pre-acquisition
earnings were allocated to our general partner. The following table summarizes the impact of this
acquisition on our Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Equity earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Four
Corners |
|
$ |
4,055 |
|
|
$ |
66 |
|
|
$ |
10,183 |
|
|
$ |
2,969 |
|
Four
Corners |
|
|
10,538 |
|
|
|
8,565 |
|
|
|
26,842 |
|
|
|
21,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined equity earnings |
|
$ |
14,593 |
|
|
$ |
8,631 |
|
|
$ |
37,025 |
|
|
$ |
24,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Four
Corners |
|
$ |
1,421 |
|
|
$ |
(2,871 |
) |
|
$ |
7,682 |
|
|
$ |
(711 |
) |
Four
Corners |
|
|
10,538 |
|
|
|
8,565 |
|
|
|
26,842 |
|
|
|
21,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined net
income |
|
$ |
11,959 |
|
|
$ |
5,694 |
|
|
$ |
34,524 |
|
|
$ |
21,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Note 4. Allocation of Net Income and Distributions
The allocation of net income between our general partner and limited partners, as reflected in
the Consolidated Statement of Partners Capital, for the three months and nine months ended
September 30, 2006 and 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Allocation to general partner: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,959 |
|
|
$ |
5,694 |
|
|
$ |
34,524 |
|
|
$ |
21,084 |
|
Pre-June 20, 2006 Four Corners equity earnings allocated
to general partner interest |
|
|
|
|
|
|
(8,565 |
) |
|
|
(15,386 |
) |
|
|
(21,795 |
) |
Pre-partnership net loss applicable to period
through August 22, 2005 |
|
|
|
|
|
|
2,192 |
|
|
|
|
|
|
|
32 |
|
Charges direct to general partner: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable general and administrative costs |
|
|
807 |
|
|
|
417 |
|
|
|
2,393 |
|
|
|
417 |
|
Core drilling indemnified costs |
|
|
679 |
|
|
|
|
|
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charges direct to general partner |
|
|
1,486 |
|
|
|
417 |
|
|
|
3,177 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) subject to 2% allocation of
general partner interest |
|
|
13,445 |
|
|
|
(262 |
) |
|
|
22,315 |
|
|
|
(262 |
) |
General partners share of net income (loss) |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners allocated share of net income (loss) before
items directly allocable to general partner interest |
|
|
269 |
|
|
|
(6 |
) |
|
|
446 |
|
|
|
(6 |
) |
Incentive distributions paid to general
partner* |
|
|
74 |
|
|
|
|
|
|
|
74 |
|
|
|
|
|
Direct charges to general partner |
|
|
(1,486 |
) |
|
|
(417 |
) |
|
|
(3,177 |
) |
|
|
(417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-partnership net loss applicable to period
through August 22, 2005 |
|
|
|
|
|
|
(2,192 |
) |
|
|
|
|
|
|
(32 |
) |
Pre June 20, 2006 Four Corners equity earnings applicable to
general partner interest |
|
|
|
|
|
|
8,565 |
|
|
|
15,386 |
|
|
|
21,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to general partner |
|
$ |
(1,143 |
) |
|
$ |
5,950 |
|
|
$ |
12,729 |
|
|
$ |
21,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,959 |
|
|
$ |
5,694 |
|
|
$ |
34,524 |
|
|
$ |
21,084 |
|
Net income (loss) allocated to general partner |
|
|
(1,143 |
) |
|
|
5,950 |
|
|
|
12,729 |
|
|
|
21,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to limited partners |
|
$ |
13,102 |
|
|
$ |
(256 |
) |
|
$ |
21,795 |
|
|
$ |
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Under the two class method of computing earnings per share, prescribed by Statement of
Financials Accounting Standards No. 128, Earnings Per Share, earnings are to be allocated to
participating securities as if all of the earnings for the period had been distributed. As a
result, the general partner receives an additional allocation of income in quarterly periods where
an assumed incentive distribution, calculated as if all earnings for the period had been
distributed, exceeds the actual incentive distribution. The assumed incentive distribution for the
three months ended September 30, 2006 is $595,000. This results in an allocation of income for the
calculation of earnings per limited partner unit as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
Net income (loss) allocated to general partner |
|
$ |
(622 |
) |
|
$ |
5,950 |
|
Net income (loss) allocated to limited partners |
|
|
12,581 |
|
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,959 |
|
|
$ |
5,694 |
|
|
|
|
|
|
|
|
9
Pursuant to the partnership agreement, income allocations are made on a quarterly basis;
therefore, earnings per limited partner unit for the nine months ended September 30, 2006 is
calculated as the sum of the quarterly earnings per limited partner unit for each of the first
three quarters of 2006. Common and subordinated unitholders share equally, on a per-unit basis, in the net income allocated
to limited partners for the three and nine months ended September 30, 2006 and 2005.
We paid or have authorized payment of the following cash distributions during 2006 (in thousands,
except for per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit |
|
Common |
|
Subordinated |
|
General |
|
Total Cash |
Payment Date |
|
Distribution |
|
Units |
|
Units |
|
Partner |
|
Distribution |
2/14/2006
|
|
$ |
0.3500 |
|
|
$ |
2,452 |
|
|
$ |
2,450 |
|
|
$ |
100 |
|
|
$ |
5,002 |
|
5/15/2006
|
|
$ |
0.3800 |
|
|
$ |
2,662 |
|
|
$ |
2,660 |
|
|
$ |
109 |
|
|
$ |
5,431 |
|
8/14/2006 (a)
|
|
$ |
0.4250 |
|
|
$ |
6,204 |
|
|
$ |
2,975 |
|
|
$ |
263 |
|
|
$ |
9,442 |
|
11/14/2006 (b)
|
|
$ |
0.4500 |
|
|
$ |
6,569 |
|
|
$ |
3,150 |
|
|
$ |
401 |
|
|
$ |
10,120 |
|
|
|
|
(a) |
|
Includes $74,000 incentive distribution rights payment. |
|
(b) |
|
The board of directors of our general partner declared this cash distribution on October 25,
2006 to be paid on November 14, 2006 to unitholders of record at the close of business on
November 6, 2006. Includes $198,000 incentive distribution rights payment. |
Note 5. Equity Investments
We use the equity method to account for our 25.1 percent ownership interest in Four Corners
and our 40 percent ownership interest in Discovery. During the period from January 1, 2006 to June
20, 2006, Four Corners made distributions to Williams associated with Four Corners operations
prior to our acquisition of a 25.1 percent ownership interest. These distributions resulted in a
revised basis used for the calculation of the 25.1 percent interest transferred to us; therefore,
the carrying value of our 25.1 percent interest in Four Corners and partners capital decreased
$11.3 million during that period.
Due to the significance of each investments equity earnings to our results of operations, the
summarized financial position and results of operations for 100 percent of Four Corners and 100
percent of Discovery are presented below (in thousands):
Williams Four Corners LLC
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Current assets |
|
$ |
50,948 |
|
|
$ |
18,832 |
|
Non-current assets |
|
|
24,020 |
|
|
|
25,228 |
|
Property, plant and equipment, net |
|
|
574,463 |
|
|
|
591,034 |
|
Current liabilities |
|
|
(19,335 |
) |
|
|
(27,978 |
) |
Non-current liabilities |
|
|
(1,118 |
) |
|
|
(1,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members capital |
|
$ |
628,978 |
|
|
$ |
605,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate |
|
$ |
75,784 |
|
|
$ |
67,747 |
|
|
$ |
209,196 |
|
|
$ |
185,340 |
|
Third-party |
|
|
56,819 |
|
|
|
52,417 |
|
|
|
166,873 |
|
|
|
150,807 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate |
|
|
32,260 |
|
|
|
25,975 |
|
|
|
106,968 |
|
|
|
77,099 |
|
Third-party |
|
|
58,360 |
|
|
|
60,066 |
|
|
|
162,161 |
|
|
|
172,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,983 |
|
|
$ |
34,123 |
|
|
$ |
106,940 |
|
|
$ |
86,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Discovery Producer Services LLC
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Current assets |
|
$ |
59,769 |
|
|
$ |
70,525 |
|
Non-current restricted cash and cash equivalents |
|
|
30,781 |
|
|
|
44,559 |
|
Property, plant and equipment, net |
|
|
349,236 |
|
|
|
344,743 |
|
Current liabilities |
|
|
(23,103 |
) |
|
|
(45,070 |
) |
Non-current liabilities |
|
|
(1,198 |
) |
|
|
(1,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members capital |
|
$ |
415,485 |
|
|
$ |
413,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate |
|
$ |
38,755 |
|
|
$ |
8,231 |
|
|
$ |
113,992 |
|
|
$ |
38,395 |
|
Third-party |
|
|
8,663 |
|
|
|
10,869 |
|
|
|
28,462 |
|
|
|
31,019 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate |
|
|
13,071 |
|
|
|
3,613 |
|
|
|
53,822 |
|
|
|
11,931 |
|
Third-party |
|
|
24,817 |
|
|
|
15,819 |
|
|
|
65,009 |
|
|
|
51,230 |
|
Interest income |
|
|
(608 |
) |
|
|
(498 |
) |
|
|
(1,835 |
) |
|
|
(1,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,138 |
|
|
$ |
166 |
|
|
$ |
25,458 |
|
|
$ |
7,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Note 6. Credit Facilities and Long-Term Debt
We may borrow up to $75.0 million under Williams $1.5 billion revolving credit facility,
which is available for borrowings and letters of credit. Borrowings under this facility mature on
May 1, 2009. Our $75.0 million borrowing limit under Williams revolving credit facility is available
for general partnership purposes, including acquisitions, but only to the extent that sufficient
amounts remain unborrowed by Williams and its other subsidiaries. At September 30, 2006, letters of
credit totaling $45.6 million had been issued on behalf of Williams by the participating
institutions under this facility and no revolving credit loans were outstanding.
We also have a $20.0 million revolving credit facility with Williams as the lender. The
facility was amended and restated on August 7, 2006. The facility is available exclusively to fund
working capital borrowings. Borrowings under the amended and restated facility will mature on June
29, 2009. We are required to reduce all borrowings under this facility to zero for a period of at
least 15 consecutive days once each 12-month period prior to the maturity date of the facility. As
of September 30, 2006, we had no outstanding borrowings under the working capital credit facility.
On June 20, 2006, we issued $150.0 million aggregate principal of 7.5 percent senior unsecured
notes in a private debt placement. The maturity date of the notes is June 15, 2011. Interest is
payable semi-annually in arrears on June 15 and December 15 of each year, with the first payment
due on December 15, 2006. Debt issuance costs associated with the notes totaled $3.1 million and
are being amortized over the life of the notes.
In connection with the issuance of the $150.0 million senior unsecured notes, sold in a
private debt placement to qualified institutional buyers, we entered into a registration rights
agreement with the initial purchasers of the senior notes whereby we agreed to conduct a registered
exchange offer of exchange notes in exchange for the senior notes or cause to become effective a
shelf registration statement providing for resale of the senior notes. The shelf registration
became effective October 20, 2006. If we fail to comply with certain obligations under the
registration rights agreement, we will be required to pay liquidated damages in the form of
additional cash interest to the holders of the senior notes. Upon the occurrence of such a failure
to comply, the interest rate on the senior notes shall be increased by 0.25 percent per annum
during the 90-day period immediately following the occurrence of such failure to comply and shall
increase by 0.25 percent per annum 90 days thereafter until all defaults have been cured, but in no
event shall such aggregate additional interest exceed 0.50 percent per annum.
The terms of the senior notes are governed by an indenture that contains affirmative and
negative covenants that, among other things, limit (1) our ability and the ability of our
subsidiaries to incur liens securing indebtedness, (2) mergers, consolidations and transfers of all
or substantially all of our properties or assets, (3) Williams Partners Finance Corporations
ability to incur additional indebtedness and (4) Williams Partners Finance Corporations ability to
engage in any business not related to obtaining money or arranging financing for us or our other
subsidiaries. Williams Partners Finance Corporation is a Delaware corporation and our wholly owned
subsidiary organized for the sole purpose of co-issuing debt securities from time to time with us.
We use the equity method of accounting for our investments in Discovery and Four Corners, and
neither will be classified as our subsidiary under the indenture so long as we continue to own a
minority interest in such entities. As a result, neither Discovery nor Four Corners will be subject
to the restrictive covenants in the indenture. The indenture also contains customary events of
default, upon which the trustee or the holders of the senior notes may declare all outstanding
senior notes to be due and payable immediately.
Pursuant to the indenture, we may issue additional notes from time to time. The senior notes
and any additional notes subsequently issued under the indenture, together with any exchange notes,
will be treated as a single class for all purposes under the indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase.
The senior notes are our senior unsecured obligations and rank equally in right of payment
with all of our other senior indebtedness and senior to all of our future indebtedness that is
expressly subordinated in right of payment to the senior notes. The senior notes will not initially
be guaranteed by any of our subsidiaries. In the future in certain instances as set forth in the
indenture, one or more of our subsidiaries may be required to guarantee the senior notes.
We may redeem the senior notes at our option in whole or in part at any time or from time to
time prior to June 15, 2011, at a redemption price per note equal to the sum of (1) the then
outstanding principal amount thereof, plus (2) accrued and unpaid interest, if any, to the
redemption date, plus (3) a specified make-whole premium (as
12
defined in the indenture). Additionally, upon a change of control (as defined in the indenture),
each holder of the senior notes will have the right to require us to repurchase all or any part of
such holders senior notes at a price equal to 101 percent of the principal amount of the senior
notes plus accrued and unpaid interest. Except upon a change of control as previously described, we
are not required to make mandatory redemption or sinking fund payments with respect to the senior
notes or to repurchase the senior notes at the option of the holders.
Note 7. Commitments and Contingencies
Environmental Matters. We are a participant in certain environmental remediation activities
associated with soil and groundwater contamination at our Conway storage facilities. These
activities relate to four projects that are in various remediation stages including assessment
studies, cleanups and/or remedial operations and monitoring. We continue to coordinate with the
Kansas Department of Health and Environment (KDHE) to develop screening, sampling, cleanup and
monitoring programs. The costs of such activities will depend upon the program scope ultimately
agreed to by the KDHE and are expected to be paid over the next two to nine years.
We have an insurance policy that covers up to $5.0 million of remediation costs until an
active remediation system is in place or April 30, 2008, whichever is earlier, excluding operation
and maintenance costs and ongoing monitoring costs for these projects to the extent such costs
exceed a $4.2 million deductible, of which $0.7 million has been incurred to date from the onset of
the policy. The policy also covers costs incurred as a result of third party claims associated
with then existing but unknown contamination related to the storage facilities. The aggregate
limit under the policy for all claims is $25.0 million. In addition, under an omnibus agreement
with Williams entered into at the closing of the IPO, Williams agreed to indemnify us for the
remediation expenditures not covered by the insurance policy, excluding costs of project management
and soil and groundwater monitoring, and certain other environmental and related obligations
arising out of or associated with the operation of the assets prior to the closing of the IPO.
There is an aggregate cap of $14.0 million on the total amount of indemnity coverage for
environmental and related expenditures under the omnibus agreement, which will be reduced by actual
recoveries under the environmental insurance policy. There is also a three-year time limitation
from the IPO closing date, August 23, 2005. The benefit of this indemnification will be accounted
for as a capital contribution to us by Williams as the costs are reimbursed. We estimate that the
approximate cost of this project management and soil and groundwater monitoring associated with the
four remediation projects at the Conway storage facilities and for which we will not be indemnified
will be approximately $0.2 million to $0.4 million per year following the completion of the
remediation work.
At September 30, 2006, we had accrued liabilities totaling $5.5 million for these costs. It
is reasonably possible that we will incur losses in excess of our accrual for these matters.
However, a reasonable estimate of such amounts cannot be determined at this time because actual
costs incurred will depend on the actual number of contaminated sites identified, the amount and
extent of contamination discovered, the final cleanup standards mandated by KDHE and other
governmental authorities and other factors.
Other. The partnership and its subsidiaries are not currently a party to any legal proceedings
but are a party to various administrative and regulatory proceedings that have arisen in the
ordinary course of our business. Management, including internal counsel, currently believes that
the ultimate resolution of the foregoing matters, taken as a whole, and after consideration of
amounts accrued, insurance coverage or other indemnification arrangements, will not have a material
adverse effect upon our future financial position.
13
Note 8. Segment Disclosures
Our reportable segments are strategic business units that offer different products and
services. The Gathering and Processing segment includes our ownership interest in Four Corners,
our ownership interest in Discovery and the Carbonate Trend gathering pipeline. The NGL Services
segment includes three integrated NGL storage facilities and a 50 percent undivided interest in a
fractionator near Conway, Kansas. The segments are managed separately because each segment
requires different industry knowledge, technology and marketing strategies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering & |
|
|
NGL |
|
|
|
|
|
|
Processing |
|
|
Services |
|
|
Total |
|
|
|
(Thousands) |
|
Three Months Ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
632 |
|
|
$ |
13,347 |
|
|
$ |
13,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
399 |
|
|
|
7,220 |
|
|
|
7,619 |
|
Product cost |
|
|
|
|
|
|
2,880 |
|
|
|
2,880 |
|
Depreciation and accretion |
|
|
300 |
|
|
|
609 |
|
|
|
909 |
|
Direct general and administrative expense |
|
|
|
|
|
|
279 |
|
|
|
279 |
|
Taxes other than income |
|
|
|
|
|
|
182 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
|
(67 |
) |
|
|
2,177 |
|
|
|
2,110 |
|
Equity earnings-Williams Four Corners |
|
|
10,538 |
|
|
|
|
|
|
|
10,538 |
|
Equity earnings-Discovery Producer Services |
|
|
4,055 |
|
|
|
|
|
|
|
4,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
14,526 |
|
|
$ |
2,177 |
|
|
$ |
16,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
2,110 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(1,375 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
650 |
|
|
$ |
11,526 |
|
|
$ |
12,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
101 |
|
|
|
8,171 |
|
|
|
8,272 |
|
Product cost |
|
|
|
|
|
|
2,258 |
|
|
|
2,258 |
|
Depreciation and accretion |
|
|
300 |
|
|
|
596 |
|
|
|
896 |
|
Direct general and administrative expense |
|
|
|
|
|
|
308 |
|
|
|
308 |
|
Taxes other than income |
|
|
|
|
|
|
194 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
|
249 |
|
|
|
(1 |
) |
|
|
248 |
|
Equity earnings-Williams Four Corners |
|
|
8,565 |
|
|
|
|
|
|
|
8,565 |
|
Equity earnings-Discovery Producer Services |
|
|
66 |
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) |
|
$ |
8,880 |
|
|
$ |
(1 |
) |
|
$ |
8,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
248 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(895 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating loss |
|
|
|
|
|
|
|
|
|
$ |
(999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering & |
|
|
NGL |
|
|
|
|
|
|
Processing |
|
|
Services |
|
|
Total |
|
|
|
(Thousands) |
|
Nine Months Ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
2,041 |
|
|
$ |
42,393 |
|
|
$ |
44,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
872 |
|
|
|
21,481 |
|
|
|
22,353 |
|
Product cost |
|
|
|
|
|
|
11,522 |
|
|
|
11,522 |
|
Depreciation and accretion |
|
|
900 |
|
|
|
1,809 |
|
|
|
2,709 |
|
Direct general and administrative expense |
|
|
9 |
|
|
|
815 |
|
|
|
824 |
|
Taxes other than income |
|
|
|
|
|
|
550 |
|
|
|
550 |
|
Other expense |
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
260 |
|
|
|
6,211 |
|
|
|
6,471 |
|
Equity earnings-Williams Four Corners |
|
|
26,842 |
|
|
|
|
|
|
|
26,842 |
|
Equity earnings-Discovery Producer Services |
|
|
10,183 |
|
|
|
|
|
|
|
10,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
37,285 |
|
|
$ |
6,211 |
|
|
$ |
43,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
6,471 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(3,785 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(1,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
1,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
2,295 |
|
|
$ |
33,426 |
|
|
$ |
35,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
477 |
|
|
|
16,315 |
|
|
|
16,792 |
|
Product cost |
|
|
|
|
|
|
8,320 |
|
|
|
8,320 |
|
Depreciation and accretion |
|
|
900 |
|
|
|
1,794 |
|
|
|
2,694 |
|
Direct general and administrative expense |
|
|
|
|
|
|
782 |
|
|
|
782 |
|
Taxes other than income |
|
|
|
|
|
|
532 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
918 |
|
|
|
5,683 |
|
|
|
6,601 |
|
Equity earnings-Williams Four Corners |
|
|
21,795 |
|
|
|
|
|
|
|
21,795 |
|
Equity earnings-Discovery Producer Services |
|
|
2,969 |
|
|
|
|
|
|
|
2,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
25,682 |
|
|
$ |
5,683 |
|
|
$ |
31,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
$ |
6,601 |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated-affiliate |
|
|
|
|
|
|
|
|
|
|
(2,005 |
) |
Third party-direct |
|
|
|
|
|
|
|
|
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income |
|
|
|
|
|
|
|
|
|
$ |
4,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion of our financial condition and results of operations in
conjunction with the consolidated financial statements included in Item 1 of Part I of this
quarterly report.
Overview
We are a Delaware limited partnership formed in February 2005. On August 23, 2005, we
completed our initial public offering (IPO) of common units. We are principally engaged in the
business of gathering, transporting, processing and treating natural gas and fractionating and
storing natural gas liquids (NGLs). We manage our business and analyze our results of operations
on a segment basis. Our operations are divided into two business segments:
|
|
|
Gathering and Processing. Our Gathering and Processing segment includes (1) our 25.1
percent ownership interest in Williams Four Corners LLC (Four Corners), (2) our 40
percent ownership interest in Discovery Producer Services LLC (Discovery) and (3) the
Carbonate Trend gathering pipeline off the coast of Alabama. The Four Corners system
gathers and processes or treats approximately 37 percent of the natural gas produced in
the San Juan Basin and connects with the five pipeline systems that transport natural gas
to end markets from the basin. Discovery owns an integrated natural gas gathering and
transportation pipeline system extending from offshore in the Gulf of Mexico to a natural
gas processing facility and an NGL fractionator in Louisiana. These assets generate
revenues by providing natural gas gathering, transporting and processing services and
integrated NGL fractionating services to customers under a range of contractual
arrangements. Although Discovery includes fractionation operations, which would normally
fall within the NGL Services segment, it is primarily engaged in gathering and processing
and is managed as such. |
|
|
|
|
NGL Services. Our NGL Services segment includes three integrated NGL storage
facilities and a 50 percent undivided interest in a fractionator near Conway, Kansas.
These assets generate revenues by providing stand-alone NGL fractionation and storage
services using various fee-based contractual arrangements where we receive a fee or fees
based on actual or contracted volumetric measures. |
Recent Events
Issuance of Common Units. On June 20, 2006, we sold 7,590,000 common units (including 990,000
common units pursuant to the underwriters over-allotment option) in a public offering. We
received net proceeds of approximately $227.1 million from the sale of the common units after
deducting underwriting discounts but before estimated offering expenses. The net proceeds were
used primarily to fund our acquisition of a 25.1 percent interest in Four Corners discussed below
and for general partnership purposes.
Issuance of Senior Unsecured Notes. On June 20, 2006, we issued $150.0 million aggregate
principal amount of 7.5 percent Senior Unsecured Notes due 2011. We received net proceeds of
approximately $146.9 million from the sale of the senior unsecured notes after deducting initial
purchaser discounts and estimated offering expenses. The net proceeds were used to fund our
acquisition of a 25.1 percent interest in Four Corners discussed below.
Acquisition of Interest in Four Corners. On June 20, 2006, we completed our acquisition of a
25.1 percent ownership interest in Four Corners for aggregate consideration of $360.0 million
($355.8 million net of our general partners capital contribution related to the issuance of common
units discussed above) that was financed by the issuance of common units and senior unsecured notes
discussed above. Four Corners natural gas gathering, processing and treating assets consist of,
among other things, the following:
|
(i) |
|
a 3,500-mile natural gas gathering system in the San Juan
Basin in New Mexico and Colorado with a capacity of two
billion cubic feet per day; |
|
|
(ii) |
|
the Ignacio natural gas processing plant in Colorado and
the Kutz and Lybrook natural gas processing plants in New
Mexico, which have a combined processing capacity of 760
million cubic feet per day (MMcf/d); and |
16
|
(iii) |
|
the Milagro and Esperanza natural gas treating plants in
New Mexico, which have a combined carbon dioxide treating
capacity of 750 MMcf/d. |
We account for the 25.1 percent interest in Four Corners as an equity investment, and
therefore will not consolidate its financial results. Because Four Corners was an affiliate of
Williams at the time of acquisition, the transaction was between entities under common control and
has been accounted for at historical cost and our Consolidated Financial Statements and Notes to
the Consolidated Financial Statements were restated to reflect the combined historical results.
Accordingly, all prior period information in the following discussion and analysis of results of
operations has been restated to reflect this change. Please read our prospectus, as filed with the
Securities and Exchange Commission on June 15, 2006, for more information related to this
transaction.
Future Acquisitions. Williams has announced that it has a goal of completing additional
transactions of approximately $1.0 billion to $1.5 billion involving gathering and processing
assets between us and Williams within the next three months. However, Williams has no obligation
to sell assets to us, and we have no control as to whether or when Williams may elect to offer us
the opportunity to acquire any such assets. In addition, the decision by us to acquire any assets
from Williams and the terms, including price, of any significant transaction between Williams and
us will be subject to the approval of the board of directors of our general partner and the terms
of such transactions may also be subject to the approval of the conflicts committee of the board of
directors of our general partner.
New Credit Facility with Williams. In May 2006, Williams replaced its $1.275 billion secured
credit facility with a $1.5 billion unsecured credit agreement. The new facility contains similar
terms and covenants as the prior facility. The new credit agreement is available for borrowings and
letters of credit and will continue to allow us to borrow up to $75.0 million for general partnership
purposes, including acquisitions, but only to the extent that sufficient amounts remain unborrowed
by Williams and its other subsidiaries. Please read Financial Condition and Liquidity Credit
Facilities for more information.
17
Results of Operations
Consolidated Overview
The following table and discussion is a summary of our consolidated results of operations for
the three and nine months ended September 30, 2006, compared to the three and nine months ended
September 30, 2005. The results of operations by segment are discussed in further detail following
this consolidated overview discussion. All prior period information in the following discussion
and analysis of results of operations has been restated to reflect our 25.1 percent interest
acquisition in Four Corners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
% Change |
|
|
Nine months ended |
|
|
% Change |
|
|
|
September 30, |
|
|
from |
|
|
September 30, |
|
|
from |
|
|
|
2006 |
|
|
2005 |
|
|
2005(1) |
|
|
2006 |
|
|
2005 |
|
|
2005(1) |
|
|
|
(Thousands) |
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Revenues |
|
$ |
13,979 |
|
|
$ |
12,176 |
|
|
|
+15 |
% |
|
$ |
44,434 |
|
|
$ |
35,721 |
|
|
|
+24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
expense |
|
|
7,619 |
|
|
|
8,272 |
|
|
|
+8 |
% |
|
|
22,353 |
|
|
|
16,792 |
|
|
|
-33 |
% |
Product cost |
|
|
2,880 |
|
|
|
2,258 |
|
|
|
-28 |
% |
|
|
11,522 |
|
|
|
8,320 |
|
|
|
-38 |
% |
Depreciation and accretion |
|
|
909 |
|
|
|
896 |
|
|
|
-1 |
% |
|
|
2,709 |
|
|
|
2,694 |
|
|
|
-1 |
% |
General and administrative
expense |
|
|
2,214 |
|
|
|
1,555 |
|
|
|
-42 |
% |
|
|
6,283 |
|
|
|
3,139 |
|
|
|
-100 |
% |
Taxes other than income |
|
|
182 |
|
|
|
194 |
|
|
|
+6 |
% |
|
|
550 |
|
|
|
532 |
|
|
|
-3 |
% |
Other expense |
|
|
|
|
|
|
|
|
|
NM |
|
|
|
5 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
13,804 |
|
|
|
13,175 |
|
|
|
-5 |
% |
|
|
43,422 |
|
|
|
31,477 |
|
|
|
-38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
175 |
|
|
|
(999 |
) |
|
NM |
|
|
|
1,012 |
|
|
|
4,244 |
|
|
|
-76 |
% |
Equity earnings Four Corners |
|
|
10,538 |
|
|
|
8,565 |
|
|
|
+23 |
% |
|
|
26,842 |
|
|
|
21,795 |
|
|
|
+23 |
% |
Equity earnings Discovery |
|
|
4,055 |
|
|
|
66 |
|
|
NM |
|
|
|
10,183 |
|
|
|
2,969 |
|
|
NM |
|
Interest expense |
|
|
(3,271 |
) |
|
|
(2,014 |
) |
|
|
-62 |
% |
|
|
(4,155 |
) |
|
|
(8,000 |
) |
|
|
+48 |
% |
Interest income |
|
|
462 |
|
|
|
76 |
|
|
NM |
|
|
|
642 |
|
|
|
76 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,959 |
|
|
$ |
5,694 |
|
|
|
+110 |
% |
|
$ |
34,524 |
|
|
$ |
21,084 |
|
|
|
+64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
+ = Favorable Change; = Unfavorable Change; NM = A percentage
calculation is not meaningful due to change in signs, a zero-value
denominator or a percentage change greater than 200. |
Three months ended September 30, 2006 vs. three months ended September 30, 2005
Revenues increased $1.8 million, or 15 percent, due primarily to higher revenues in our NGL
Services segment reflecting higher storage and fractionation revenues. These increases are
discussed in detail in the Results of Operations NGL Services section.
Operating and maintenance expense decreased $0.7 million, or eight percent, due primarily to
our NGL Services segment where a favorable change in product imbalance adjustments was partially
offset by increased fuel, power and cavern workover costs.
Product cost increased $0.6 million, or 28 percent, due to higher sales volumes in our NGL
Services segment. These increases are discussed in detail in the Results of Operations NGL
Services section.
18
General and administrative expense increased $0.7 million, or 42 percent, due primarily to the
increased costs of being a publicly traded partnership. These costs included $0.4 million for
charges allocated by Williams for accounting, legal and other support and $0.2 million for tax
return preparation.
Operating income (loss) improved $1.2 million, from a loss of $1.0 million to income of $0.2
million, due primarily to higher NGL Services storage and fractionation revenues and lower
operating and maintenance expense, partially offset by higher general and administrative expense.
Equity earnings from Four Corners and Discovery increased $2.0 million and $4.0 million,
respectively. These increases are discussed in detail in the Results of Operations Gathering
and Processing section.
Interest expense increased $1.3 million, or 62 percent, due to interest on our $150 million
senior unsecured notes issued in June 2006 to finance a portion of our acquisition of a 25.1
percent interest in Four Corners and a full quarter of commitment fees on our credit facilities.
This increase was partially offset by the impact on interest expense of the forgiveness of the
advances from Williams in conjunction with the closing of our IPO on August 23, 2005.
Nine months ended September 30, 2006 vs. nine months ended September 30, 2005
Revenues increased $8.7 million, or 24 percent, due primarily to higher revenues in our NGL
Services segment reflecting higher storage and fractionation revenues and increased product sales
revenues. These increases are discussed in detail in the Results of Operations NGL Services
section.
Operating and maintenance expense increased $5.6 million, or 33 percent, due primarily to our
NGL Services segment where fuel and power costs and cavern workover costs increased.
Product cost increased $3.2 million, or 38 percent, directly related to increased product
sales discussed above.
General and administrative expense increased $3.1 million, or 100 percent, due primarily to
the increased costs of being a publicly traded partnership. These costs included $1.4 million for
charges allocated by Williams for accounting, legal and other support, $1.1 million for audit fees,
tax return preparation, director fees and agency rating fees and $0.5 million for activities of the
conflicts committee of the board of directors of our general partner associated with our
acquisition of a 25.1 percent interest in Four Corners.
Operating income decreased $3.2 million, or 76 percent, due primarily to higher operating and
maintenance expense and general and administrative expense, partially offset by higher NGL
Services storage and fractionation revenues.
Equity earnings from Four Corners and Discovery increased $5.0 million and $7.2 million,
respectively. Both of these increases are discussed in detail in the Results of Operations
Gathering and Processing section.
Interest expense decreased $3.8 million, or 48 percent, due to $7.4 million lower interest
following the forgiveness of the advances from Williams in conjunction with the closing of our IPO
on August 23, 2005. This decrease was partially offset by $3.1 million of interest on our $150.0
million senior unsecured notes issued in June 2006 to finance a portion of our acquisition of a
25.1 percent interest in Four Corners.
19
Results of Operations Gathering and Processing
The Gathering and Processing segment includes the Carbonate Trend gathering pipeline, our 25.1
percent ownership interest in Four Corners and our 40 percent ownership interest in Discovery.
Four Corners and Discovery are accounted for using the equity method of accounting. As such, our
interest in Four Corners and Discoverys net operating results are reflected as equity earnings in
the Consolidated Statements of Income. Due to the significance of Four Corners and Discoverys
equity earnings to our results of operations, the discussion below addresses in greater detail the
results of operations for 100 percent of both Four Corners and Discovery.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Segment revenues |
|
$ |
632 |
|
|
$ |
650 |
|
|
$ |
2,041 |
|
|
$ |
2,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
399 |
|
|
|
101 |
|
|
|
872 |
|
|
|
477 |
|
Depreciation |
|
|
300 |
|
|
|
300 |
|
|
|
900 |
|
|
|
900 |
|
General and administrative expense
direct |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
699 |
|
|
|
401 |
|
|
|
1,781 |
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
|
(67 |
) |
|
|
249 |
|
|
|
260 |
|
|
|
918 |
|
Equity earnings Four Corners |
|
|
10,538 |
|
|
|
8,565 |
|
|
|
26,842 |
|
|
|
21,795 |
|
Equity earnings Discovery |
|
|
4,055 |
|
|
|
66 |
|
|
|
10,183 |
|
|
|
2,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
14,526 |
|
|
$ |
8,880 |
|
|
$ |
37,285 |
|
|
$ |
25,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbonate Trend
Segment operating income (loss) for the three and nine months ended September 30, 2006
decreased $0.3 million and $0.7 million, respectively, due to higher insurance premiums related to
the increased hurricane activity in the Gulf Coast region in 2005. In addition, gathering revenues
decreased during the first nine months of 2006 due to declines in average daily gathered volumes.
These volumetric declines are caused by normal reservoir depletion that was not offset by new
sources of throughput.
20
Four Corners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Revenues |
|
$ |
132,603 |
|
|
$ |
120,164 |
|
|
$ |
376,069 |
|
|
$ |
336,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses, including interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product cost and shrink replacement |
|
|
41,821 |
|
|
|
42,235 |
|
|
|
121,898 |
|
|
|
115,087 |
|
Operating and maintenance expense |
|
|
29,950 |
|
|
|
24,429 |
|
|
|
93,570 |
|
|
|
76,810 |
|
Depreciation and amortization |
|
|
10,035 |
|
|
|
9,673 |
|
|
|
29,801 |
|
|
|
29,107 |
|
General and administrative expense |
|
|
6,554 |
|
|
|
6,783 |
|
|
|
21,248 |
|
|
|
21,092 |
|
Taxes other than income |
|
|
2,170 |
|
|
|
1,976 |
|
|
|
5,842 |
|
|
|
5,909 |
|
Other (income) expense, net |
|
|
90 |
|
|
|
945 |
|
|
|
(3,230 |
) |
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses, including interest |
|
|
90,620 |
|
|
|
86,041 |
|
|
|
269,129 |
|
|
|
249,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,983 |
|
|
$ |
34,123 |
|
|
$ |
106,940 |
|
|
$ |
86,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williams
Partners 25.1 percent interest
Equity earnings per our Consolidated
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,538 |
|
|
$ |
8,565 |
|
|
$ |
26,842 |
|
|
$ |
21,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 vs. three months ended September 30, 2005
Revenues increased $12.4 million, or ten percent, due to $9.2 million higher product sales and
$3.2 million higher gathering and processing revenue.
Product sales revenues increased due primarily to:
|
|
|
$6.3 million related to a 17 percent increase in average NGL sales prices realized on
sales of NGLs that Four Corners received under certain processing contracts. This increase
resulted from general increases in market prices for these commodities between the two
periods; |
|
|
|
|
$3.8 million related to an 11 percent increase in NGL volumes that Four Corners received
under certain processing contracts. This increase was related primarily to equipment
outages in the third quarter of 2005; and |
|
|
|
|
$0.7 million of higher liquefied natural gas (LNG) sales related primarily to an
increase in volumes sold. |
|
|
|
|
These product sales increases were partially offset by $1.6 million lower sales of NGLs
on behalf of third party producers who have Four Corners market their NGLs for a fee in
accordance with their contracts. Under these arrangements, Four Corners purchases the NGLs
from the third party producers and sells them to an affiliate. This decrease is offset by
lower associated product costs of $1.6 million discussed below. |
The $3.2 million increase in fee-based gathering and processing revenues is due primarily to
$3.9 million higher revenue from a seven percent increase in the average gathering and processing
rates, partially offset by $0.7 million lower revenue from a one percent decrease in gathering and
processing volumes. The average gathering and processing rates increased in 2006 largely as a
result of contractual escalation clauses. Most of Four Corners gathering contracts include
escalation clauses that provide for an annual escalation based on an inflation-sensitive index. One
significant gathering agreement is escalated based on changes in the average price of natural gas.
21
Product cost and shrink replacement decreased $0.4 million, or one percent, due primarily to:
|
|
|
$1.2 million net increase from a $3.6 million increase caused by 23 percent higher
volumetric shrink requirements under Four Corners keep-whole processing contracts,
partially offset by a $2.4 million decrease from 13 percent lower average natural gas
prices; and |
|
|
|
|
$1.6 million decrease from third party producers who elected to have Four Corners market
their NGLs. This increase is offset by the corresponding increase in product sales
discussed above. |
Operating and maintenance expense increased $5.5 million, or 23 percent, due primarily to:
|
|
|
$4.2 million increase in materials and supplies and outside services expense related
primarily to increased compression, environmental and maintenance costs; |
|
|
|
|
$2.3 million in other increases including a $2.0 million correction of understated
leased compression expense in the second quarter of 2006. Our management concluded that
the effect of this correction was not material to our consolidated results for the third
quarter of 2006, or the prior period or to our trend in earnings; and |
|
|
|
|
$1.6 million increase in labor and benefits increases primarily caused by adjustments to
Williams annual incentive program. |
|
|
|
|
These increases were partially offset by a $2.6 million decrease in non-shrink natural
gas purchases due primarily to lower system losses. |
Other expense, net decreased $0.9 million due primarily to the absence of a loss contingency
recorded in the third quarter of 2005.
Net income increased $7.9 million, or 23 percent, due primarily to $8.9 million from higher
processing margins caused by increased per-unit margins on higher NGL sales volumes and $3.2
million of higher fee-based gathering and processing revenues, partially offset by $5.5 million of
higher operating and maintenance expense.
Nine months ended September 30, 2006 vs. nine months ended September 30, 2005
Revenues increased $39.9 million, or 12 percent, due to $30.2 million higher product sales and
$9.6 million higher gathering and processing revenues. Product sales revenues increased due
primarily to:
|
|
|
$21.0 million related to a 23 percent increase in average NGL sales prices realized on
sales of NGLs which Four Corners received under certain processing contracts. This
increase resulted from general increases in market prices for these commodities between the
two periods; |
|
|
|
|
$4.1 million related to a five percent increase in NGL volumes that Four Corners
received under certain processing contracts. This increase was related primarily to
reduced equipment outages in 2005; |
|
|
|
|
$3.5 million of higher condensate sales, which includes $1.9 million resulting from the
recognition of two additional months of condensate revenue in 2006. Prior to 2006,
condensate revenue had been recognized two months in arrears. As a result of more timely
sales information now made available from third parties, we have recorded these on a
current basis and thus have fully recognized this activity through September 30, 2006. Our
management concluded that the effect of recording the additional two months was not
material to our results for 2006, prior periods or our trend of earnings; and |
|
|
|
|
$3.1 million of higher LNG sales related primarily to an increase in volumes sold. |
|
|
|
|
These product sales increases were partially offset by $1.4 million lower sales of NGLs
on behalf of third party producers who have Four Corners market their NGLs for a fee in
accordance with their contracts. |
22
|
|
|
Under these arrangements, Four Corners purchases the NGLs from the third party producers and
sells them to an affiliate. This decrease is offset by lower associated product costs of
$1.4 million discussed below. |
The $9.6 million increase in fee-based gathering and processing revenues is due primarily to
$11.2 million higher revenue from a seven percent increase in the average gathering and processing
rates, partially offset by $1.6 million lower revenue from a one percent decrease in gathering and
processing volumes. The average gathering and processing rates increased in 2006 largely as a
result of contractual escalation clauses. One significant gathering agreement is escalated based on
changes in the average price of natural gas.
Product cost and shrink replacement increased $6.8 million, or six percent, due primarily to:
|
|
|
$4.9 million increase from 12 percent higher volumetric shrink requirements under Four
Corners keep-whole processing contracts; |
|
|
|
|
$1.3 million increase from three percent higher average natural gas prices; |
|
|
|
|
$2.0 million increase related to increased condensate and LNG sales; and |
|
|
|
|
$1.4 million decrease from third party producers who elected to have Four Corners market
their NGLs. This increase is offset by the corresponding increase in product sales
discussed above. |
Operating and maintenance expense increased $16.8 million, or 22 percent, due primarily to:
|
|
|
$11.3 million increase in materials and supplies, outside services and other operating
expenses related primarily to increased compression and maintenance costs; |
|
|
|
|
$2.8 million increase in labor and benefits caused by adjustments to Williams annual
incentive program and the addition of new personnel; and |
|
|
|
|
$2.7 million increase in non-shrink natural gas purchases due primarily to higher
volumetric gathering fuel requirements and higher system losses. |
Other (income) expense, net improved $4.5 million due primarily to a $3.3 million gain
recognized on the sale of the LaMaquina treating facility in the first quarter of 2006. The
LaMaquina treating facility was shut down in 2002, and impairments were recorded in 2003 and 2004.
Additionally, a $0.9 million loss contingency was recorded in the third quarter of 2005.
Net income increased $20.1 million, or 23 percent, due primarily to $23.4 million from higher
net liquids margins resulting primarily from increased per-unit margins on higher NGL sales
volumes, $9.6 million of higher fee-based gathering and processing revenues and the $4.5 million
improvement in other (income) expense, net. These increases were partially offset by $16.8 million
higher operating and maintenance expense.
23
Discovery Producer Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Revenues |
|
$ |
47,418 |
|
|
$ |
19,100 |
|
|
$ |
142,454 |
|
|
$ |
69,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses, including interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product cost and shrink replacement |
|
|
25,631 |
|
|
|
7,763 |
|
|
|
83,079 |
|
|
|
28,598 |
|
Operating and maintenance expense |
|
|
5,095 |
|
|
|
4,063 |
|
|
|
15,149 |
|
|
|
13,174 |
|
Depreciation and accretion |
|
|
6,380 |
|
|
|
6,127 |
|
|
|
19,133 |
|
|
|
18,366 |
|
General and administrative expense |
|
|
372 |
|
|
|
517 |
|
|
|
1,606 |
|
|
|
1,535 |
|
Interest income |
|
|
(608 |
) |
|
|
(498 |
) |
|
|
(1,835 |
) |
|
|
(1,171 |
) |
Other (income) expense, net |
|
|
410 |
|
|
|
962 |
|
|
|
(136 |
) |
|
|
1,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses, including interest |
|
|
37,280 |
|
|
|
18,934 |
|
|
|
116,996 |
|
|
|
61,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,138 |
|
|
$ |
166 |
|
|
$ |
25,458 |
|
|
$ |
7,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williams Partners 40 percent interest
Equity earnings per our Consolidated
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,055 |
|
|
$ |
66 |
|
|
$ |
10,183 |
|
|
$ |
2,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 vs. three months ended September 30, 2005
Revenues increased $28.3 million, or 148 percent, due primarily to higher NGL product sales
from the marketing of customers NGLs. In addition, the Texas Eastern Transmission Company
(TETCO) open season agreement, which began in the last quarter of 2005, contributed $2.4 million
in revenues for the third quarter of 2006. The Tennessee Gas Pipeline (TGP) and TETCO open
seasons provided outlets for natural gas that was stranded following damage to third-party
facilities during hurricanes Katrina and Rita. In October 2006, we signed a one-year contract with
TETCO which is discussed further in the Outlook section. The significant components of the revenue
increase are addressed more fully below.
|
|
|
Product sales increased $18.2 million for NGL sales related to third-party processing
customers elections to have Discovery market their NGLs for a fee under an option in their
contracts. Under these arrangements, Discovery purchases the NGLs from the third-party
processing customers and sells them to an affiliate. These sales were offset by higher
associated product costs of $18.2 million discussed below. |
|
|
|
|
Product sales also increased approximately $9.7 million due to NGL sales that Discovery received under certain processing contracts of
approximately 14.0 million gallons in 2006 compared to 4.4 million gallons in 2005. NGL
sales volumes in 2005 were lower due primarily to the temporary shutdown of the Discovery
assets for hurricanes. |
|
|
|
|
Transportation revenue increased $1.6 million, including $0.8 million due to additional
fee-based revenues related to the TETCO open season agreement discussed above. |
|
|
|
|
Processing and fractionation revenue increased $1.6 million in additional fee-based
revenues related to the TETCO open season agreement. |
Partially offsetting these increases were the following:
|
|
|
Product sales decreased $2.3 million due to the absence of excess fuel and shrink
replacement gas sales in 2006. |
24
|
|
|
Gathering revenues decreased $0.4 million due to a rate decrease partially offset by
increased gathered volumes. |
Product cost and shrink replacement increased $17.9 million due primarily to $18.2 million of
product purchase costs for the processing customers who elected to have Discovery market their
NGLs.
Operating and maintenance expense increased $1.0 million, or 25 percent, primarily due to
hurricane-related survey costs and increased property insurance premiums.
Depreciation and accretion expense increased $0.3 million, or four percent, due primarily to
the market expansion project placed in service in September 2005.
Other expense decreased $0.6 million, or 57 percent, due primarily to a non-cash foreign
currency transaction loss from the revaluation of restricted cash accounts denominated in Euros.
These restricted cash accounts were established from contributions made by Discoverys members,
including us, for the construction of the Tahiti pipeline lateral expansion project.
Net income increased $10.0 million, due primarily to $7.7 million higher gross processing
margins resulting from higher NGL sales volumes as compared to the prior year and $2.4 million
higher revenues from the TETCO open season agreement.
Nine months ended September 30, 2006 vs. Nine months ended September 30, 2005
Revenues increased $73.0 million, or 105 percent, due primarily to higher NGL product sales
from the marketing of customers NGLs. In addition, TGP and TETCO open seasons, which began in the
last quarter of 2005, accounted for $13.0 million in revenues. The significant components of the
revenue increase are addressed more fully below.
|
|
|
Product sales increased $63.7 million for NGL sales related to third-party processing
customers elections to have Discovery market their NGLs for a fee under an option in their
contracts. These sales were offset by higher associated product costs of $63.7 million
discussed below. |
|
|
|
|
Fee-based processing and fractionation revenues increased $7.3 million, including $8.3
million in additional fee-based revenues related to the TGP and TETCO open seasons
discussed above, $1.7 million from increased volumes and fees from the wells that came
on-line in 2006 and $0.6 million from increased volumes from existing wells, partially
offset by a $3.3 million decrease in by-pass revenues and other throughput declines. |
|
|
|
|
Transportation revenues increased $4.6 million, including $4.7 million in additional
fee-based revenues related to the TGP and TETCO open seasons discussed above, $1.8 million
in revenues from wells that came on-line in 2006 and $1.0 million in other tariff rate
changes, partially offset by $2.8 million related to other throughput declines. |
|
|
|
|
Product sales also increased approximately $4.0 million as a result of $5.3 million from
19 percent higher average NGL sales prices, partially offset by $1.3 million from a four
percent decrease in sales volumes. |
Partially offsetting these increases were the following:
|
|
|
Product sales decreased $3.2 million due to the absence of excess fuel and shrink
replacement gas sales in 2006. |
|
|
|
|
Gathering revenues decreased $3.2 million due primarily to a $1.8 million decrease
related to a decline in both gathered volumes and rates and a $1.4 million deficiency
payment received in the first quarter of 2005. |
25
Product cost and shrink replacement increased $54.5 million, or 191 percent, due primarily to
$63.7 million higher product purchase costs for the processing customers who elected to have
Discovery market their NGLs, partially offset by $5.0 million lower costs related to reduced
processing volumes in 2006, $3.2 million decrease due to the absence of excess fuel and shrink
replacement gas sales in 2006, and $1.2 million for net system gains from 2005.
Operating and maintenance expense increased $2.0 million, or 15 percent, due primarily to
higher fuel costs related to increased processing throughput volumes primarily for open season
processing in 2006 and higher property insurance premiums related to the increased hurricane
activity in the Gulf Coast region in prior years.
Depreciation and accretion expense increased $0.8 million, or four percent, due primarily to
the market expansion project placed in service in September 2005.
Interest income increased $0.7 million due primarily to interest earned on funds restricted
for use in the construction of the Tahiti pipeline lateral expansion project.
Other (income) expense, net improved $1.6 million due primarily to a $1.9 million non-cash
foreign currency transaction gain from the revaluation of restricted cash accounts denominated in
Euros. These restricted cash accounts were established from contributions made by Discoverys
members, including us, for the construction of the Tahiti pipeline lateral expansion project.
Net income increased $18.0 million, from $7.4 million, due primarily to the $13.0 million
higher revenues from TGP and TETCO open seasons and $10.0 million higher gross processing margins,
partially offset by $3.2 million lower gathering revenues and $2.0 million higher operating and
maintenance.
Outlook
Carbonate Trend
During the remainder of 2006, recompletions and workovers may not offset production declines
from the wells currently connected to the Carbonate Trend pipeline.
In connection with our restoration activities for the partial erosion of the pipeline
overburden caused by Hurricane Ivan in September 2004, the Carbonate Trend pipeline may experience
a temporary shut down. We estimate that this shut down could reduce our cash flows from
operations, excluding the maintenance expenditures, by approximately $0.2 million to $0.3 million.
Four Corners
Throughput volumes on Four Corners gathering, processing and treating system are an important
component of maximizing its profitability. Throughput volumes from existing wells connected to its
pipelines will naturally decline over time. Accordingly, to maintain or increase throughput levels
Four Corners must continually obtain new supplies of natural gas.
|
|
|
In 2007, we anticipate that sustained drilling activity, expansion opportunities and
production enhancement activities by existing customers should be sufficient to more than
offset the historical decline and increase gathered and processed volumes. |
|
|
|
|
Four Corners has realized above average margins at its gas processing plants in recent
years because of volatile natural gas and crude oil markets. We expect per-unit margins in
2006 will remain strong in relation to historical averages. Additionally, we anticipate
that Four Corners contract mix and commodity management activities will continue to allow
it to realize greater margins relative to industry averages. |
|
|
|
|
We anticipate that operating costs, excluding compression, will increase in 2006.
Compression cost increases are dependent upon the extent and amount of additional
compression needed to meet the needs of Four Corners customers and the cost at which
compression can be purchased, leased and operated. |
26
|
|
|
Additionally, Four Corners has made unbudgeted expenditures in 2006 that are expected to
have a positive long-term economic impact. |
|
|
|
|
We anticipate that the natural gas fuel cost associated with the operation of the
Milagro treating plant will increase due to the expiration, in October 2006, of a natural
gas purchase contract with Williams that contained pricing that has recently been below
market. |
|
|
|
|
We are conducting negotiations with the Jicarilla Apache Nation (JAN) in Northern New
Mexico for the renewal of certain rights of way on reservation lands. The current right of
way agreement, which covers certain gathering system assets in Rio Arriba County, NM,
expires on December 31, 2006. JAN has recently advised us that they do not intend to extend
the existing right of way agreement and asked that we enter into negotiations for the sale
of those gathering system assets to JAN. We anticipate further discussions that could
include renewal, sale or other options that might be in the mutual interest of both
parties. |
Discovery
Throughput volumes on Discoverys pipeline system are an important component of maximizing its
profitability. Pipeline throughput volumes from existing wells connected to its pipelines will
naturally decline over time. Accordingly, to maintain or increase throughput levels on these
pipelines and the utilization rate of Discoverys natural gas plant and fractionator, Discovery
must continually obtain new supplies of natural gas.
|
|
|
The Tahiti pipeline lateral expansion project is currently on schedule. We anticipate
initial throughput will begin in April 2008. We expect this agreement will have a
significant favorable impact on Discoverys revenues. |
|
|
|
|
Discovery signed a one-year processing contract with TETCO effective October 2006 for a
minimum volume of 100 billion British Thermal Units a day (BBtu/d) and a maximum of 300
BBtu/d. |
|
|
|
|
With the current oil and natural gas price environment, drilling activity across the
shelf and the deepwater of the Gulf of Mexico has been robust. However, the availability
of specialized rigs necessary to drill in the deepwater areas, such as those in and around
Discoverys gathering areas, limits the ability of producers to bring identified reserves
to market quickly. This will prolong the timeframe over which these reserves will be
developed. We expect Discovery to be successful in competing for a portion of these new
volumes. |
|
|
|
|
On March 31, 2006, Discovery connected a new well in ATP Oil & Gas Corporations Gomez
prospect; currently the rate is approximately 40 BBtu/d. We expect the rate to increase
from this level in the first quarter of 2007. |
|
|
|
|
Insurance premiums have increased dramatically from approximately $2.3 million in 2005
to the current level of $4.9 million in 2006 on an annual basis. We have no reason to
expect premiums to materially change from this amount in the near term. |
|
|
|
|
During the second quarter of 2006, Discovery began receiving additional production at
South Timbalier 41, and is currently flowing approximately 100 BBtu/d. |
|
|
|
|
In September 2006, Discovery began receiving additional production at South Timbalier
219/220, and is currently flowing approximately 25 BBtu/d. |
27
Results of Operations NGL Services
The NGL Services segment includes our three NGL storage facilities near Conway, Kansas and our
undivided 50 percent interest in the Conway fractionator.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Segment revenues |
|
$ |
13,347 |
|
|
$ |
11,526 |
|
|
$ |
42,393 |
|
|
$ |
33,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense |
|
|
7,220 |
|
|
|
8,171 |
|
|
|
21,481 |
|
|
|
16,315 |
|
Product cost |
|
|
2,880 |
|
|
|
2,258 |
|
|
|
11,522 |
|
|
|
8,320 |
|
Depreciation and accretion |
|
|
609 |
|
|
|
596 |
|
|
|
1,809 |
|
|
|
1,794 |
|
General and administrative expense direct |
|
|
279 |
|
|
|
308 |
|
|
|
815 |
|
|
|
782 |
|
Taxes other than income |
|
|
182 |
|
|
|
194 |
|
|
|
550 |
|
|
|
532 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
11,170 |
|
|
|
11,527 |
|
|
|
36,182 |
|
|
|
27,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) |
|
$ |
2,177 |
|
|
$ |
(1 |
) |
|
$ |
6,211 |
|
|
$ |
5,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 vs. three months ended September 30, 2005
Segment revenues increased $1.8 million, or 16 percent, due primarily to higher storage and
fractionation revenues. The significant components of the revenue fluctuations are addressed more
fully below.
|
|
|
Storage revenues increased $1.2 million due primarily to higher average storage
volumes from additional short-term storage leases caused by the reduced demand for
propane during the mild 2006 winter. |
|
|
|
|
Fractionation revenues increased $0.3 million due primarily to 16 percent higher
fractionation volumes. |
|
|
|
|
Product sales were $0.2 million higher due to higher sales volumes. |
Operating and maintenance expense decreased $1.0 million, or 12 percent, due primarily to a
$1.6 million favorable change in product imbalance adjustments. This decrease was partially offset
by a $0.6 million increase in operating and maintenance expense caused by increased storage cavern
workovers and fuel and power costs.
Product cost increased $0.6 million, or 28 percent, due to the higher product sales volumes
discussed above.
Segment profit (loss) improved $2.2 million due primarily to $1.5 million higher storage and
fractionation revenues and $1.0 million lower operating and maintenance expense, partially offset
by the decrease in product sales margin of $0.4 million.
Nine months ended September 30, 2006 vs. nine months ended September 30, 2005
Segment revenues increased $9.0 million, or 27 percent, due primarily to higher storage and
fractionation revenues and higher product sales. The significant components of the revenue
increase are addressed more fully below.
|
|
|
Storage revenues increased $3.2 million due primarily to higher average storage
volumes from additional short-term storage leases caused by the reduced demand for
propane during the mild 2006 winter. |
28
|
|
|
Product sales were $2.7 million higher due to higher sales volumes. |
|
|
|
|
Fractionation revenues increased $2.5 million due primarily to 26 percent higher
volumes and a seven percent increase in the average fractionation rate related to the
pass through to customers of increased fuel and power costs. |
Operating and maintenance expense increased $5.2 million, or 32 percent, due primarily to a
$6.9 million increase in operating and maintenance expense caused by increased storage cavern
workovers and fuel and power costs. This increase was partially offset by a $2.0 million favorable
change in product imbalance adjustments.
Product cost increased $3.2 million, or 38 percent, due to the higher product sales volumes
discussed above.
Segment profit increased $0.5 million, or nine percent, due primarily to $5.7 million higher
storage and fractionation revenues, substantially offset by $5.2 million higher operating and
maintenance expense.
Outlook
|
|
|
For the fourth quarter of 2006, we anticipate that fractionation volumes will average
approximately 34,000 barrels per day, which is a decrease from the third quarters average
of 38,500 barrels per day. The commodity differential between Conway and Mont Belvieu
currently favors fractionation at Mont Belvieu. One of our customers is forecasting
sending certain volumes south to Mont Belvieu in accordance with their contract option. We
expect continued income from the blending and segregation of various products. |
|
|
|
|
During the first quarter of 2006, we received storage volume nominations for the storage
year beginning April 1, 2006 that will generate revenues equal to last years record
levels. We have experienced record physical storage volumes and generated 1.7 million
barrels of short-term storage leases during the third quarter of 2006. We expect minimal
additional short-term leases during the remainder of 2006 as storage volumes are near
capacity for a number of products. |
|
|
|
|
We continue to execute a large number of storage cavern workovers and wellhead
modifications to comply with KDHE regulatory requirements. We expect outside service costs
to continue at current levels throughout 2006 and 2007 to ensure that we meet the
regulatory compliance requirement to complete cavern wellhead modifications before the end
of 2008. Our forecast for the end of 2006 is to complete approximately 38 cavern workovers
compared to 30 in 2005. |
Financial Condition and Liquidity
Outlook for 2006
We believe we have the financial resources and liquidity necessary to meet future requirements
for working capital, capital and investment expenditures, and quarterly cash distributions. We
anticipate our sources of liquidity for the remainder of 2006 will include:
|
|
|
Cash and cash equivalents; |
|
|
|
|
Cash generated from operations; |
|
|
|
|
Cash distributions from Four Corners and Discovery; |
|
|
|
|
Capital contributions from Williams pursuant to an omnibus agreement; and |
|
|
|
|
Credit facilities, as needed. |
Our cash and cash equivalents increased $16.5 million on June 20, 2006 upon the completion of
our acquisition of a 25.1 percent ownership interest in Four Corners. This amount represents the
excess of net proceeds generated by our offering of common units and issuance of senior unsecured
notes above the purchase price for the Four Corners interest. We have retained this cash to be
used for general partnership purposes.
29
We anticipate our more significant capital requirements for the remainder of 2006 to be:
|
|
|
Maintenance capital expenditures for our Conway assets; |
|
|
|
|
Quarterly distributions to our unitholders; and |
|
|
|
|
Carbonate Trend overburden restoration. |
Four Corners
Historically, Four Corners sources of liquidity included cash generated from operations and
advances from Williams. Four Corners limited liability company agreement, as amended effective
June 20, 2006, provides for the distribution of available cash on at least a quarterly basis. We
expect future cash requirements for Four Corners relating to working capital, maintenance capital
expenditures and quarterly cash distributions to its members to be funded from cash flows
internally generated from its operations. Growth or expansion capital expenditures for Four Corners
will be funded either by cash calls to its members, which require unanimous consent of the members
except in limited circumstances, or from internally generated funds. Four Corners made the
following distributions to its members during the third quarter of 2006 (all amounts in thousands):
|
|
|
|
|
|
|
|
|
Date of Distribution |
|
Total Distribution to Members |
|
Our 25.1% Share |
8/31/06
|
|
$ |
17,164 |
|
|
$ |
4,308 |
|
9/30/06
|
|
$ |
21,522 |
|
|
$ |
5,402 |
|
Discovery
Discovery expects to make quarterly distributions of available cash to its members pursuant to
the terms of its limited liability company agreement. Discovery made the following distributions
to its members in 2006 (all amounts in thousands):
|
|
|
|
|
|
|
|
|
Date of Distribution |
|
Total Distribution to Members |
|
Our 40% Share |
1/31/06
|
|
$ |
11,000 |
|
|
$ |
4,400 |
|
4/28/06
|
|
$ |
9,000 |
|
|
$ |
3,600 |
|
7/31/06
|
|
$ |
10,000 |
|
|
$ |
4,000 |
|
10/30/06
|
|
$ |
11,000 |
|
|
$ |
4,400 |
|
In 2005, Discovery sustained damages from Hurricane Katrina. The estimated total cost for
hurricane-related repairs is approximately $8.3 million, including $7.0 million in potentially
reimbursable expenditures in excess of its deductible. Discovery funded these repairs with cash
flows from operations and is seeking reimbursement from its insurance carrier. The insurance
receivable at September 30, 2006 was $7.0 million.
We expect future cash requirements for Discovery relating to working capital and maintenance
capital expenditures to be funded from its own internally generated cash flows from operations.
Growth or expansion capital expenditures for Discovery will be funded either by cash calls to its
members, which requires unanimous consent of the members except in limited circumstances, or from
internally generated funds.
Capital Contributions from Williams
Capital contributions from Williams required under the omnibus agreement consist of the
following:
|
|
|
Indemnification of environmental and related expenditures for a period of three years
(for certain of those expenditures) up to $14 million, which includes between $3.4 million
and $4.6 million for the restoration activities due to the partial erosion of the Carbonate
Trend pipeline overburden by Hurricane Ivan, approximately $3.1 million for capital
expenditures related to KDHE-related cavern compliance at our Conway storage facilities,
and approximately $1.0 million for our 40 percent share of Discoverys costs for |
30
|
|
|
marshland restoration and repair or replacement of Paradis emission-control flare. As of
September 30, 2006 we have received $2.4 million from Williams for these items. |
|
|
|
An annual credit for general and administrative expenses of $3.2 million in 2006, $2.4
million in 2007, $1.6 million in 2008 and $0.8 million in 2009. For the nine months ended
September 30, 2006 we have received $2.4 million in credits. |
|
|
|
|
Up to $3.4 million to fund our 40 percent share of the expected total cost of
Discoverys Tahiti pipeline lateral expansion project in excess of the $24.4 million we
contributed during September 2005. |
Credit Facilities
We may borrow up to $75.0 million under Williams $1.5 billion revolving credit facility,
which is available for borrowings and letters of credit. Borrowings under this facility mature on
May 1, 2009. Our $75.0 million borrowing limit under Williams revolving credit facility is
available for general partnership purposes, including acquisitions, but only to the extent that
sufficient amounts remain unborrowed by Williams and its other subsidiaries. At September 30,
2006, letters of credit totaling $45.6 million had been issued on behalf of Williams by the
participating institutions under this facility and no revolving credit loans were outstanding.
We also have a $20.0 million revolving credit facility with Williams as the lender. The
facility was amended and restated on August 7, 2006. The facility is available exclusively to fund
working capital borrowings. Borrowings under the amended and restated facility will mature on June
29, 2009. We are required to reduce all borrowings under this facility to zero for a period of at
least 15 consecutive days once each 12-month period prior to the maturity date of the facility. As
of September 30, 2006 we had no outstanding borrowings under the working capital credit facility.
Four Corners has a $20.0 million loan agreement with Williams as the lender. The loan
agreement is revolving in nature and is available to fund working capital borrowings and for other
purposes. Borrowings under the loan agreement will mature on June 20, 2009.
Senior Unsecured Notes
In June 2006, we issued $150.0 million aggregate principal amount of senior notes. The senior
notes bear interest at 7.5 percent per annum payable semi-annually in arrears on June 15 and
December 15 of each year, with the first payment due on December 15, 2006. We will make each
interest payment to the holders of record on the immediately preceding June 1 and December 1. The
senior notes mature on June 15, 2011. The senior notes are our senior unsecured obligations and
rank equally in right of payment with all of our other senior indebtedness and senior to all of our
future indebtedness that is expressly subordinated in right of payment to the senior notes. The
senior notes will not initially be guaranteed by any of our subsidiaries. In the future in certain
instances as set forth in the indenture, one or more of our subsidiaries may be required to
guarantee the senior notes.
The terms of the senior notes are governed by an indenture that contains affirmative and
negative covenants that, among other things, limit (1) our ability and the ability of our
subsidiaries to incur liens securing indebtedness, (2) mergers, consolidations and transfers of all
or substantially all of our properties or assets, (3) Williams Partners Finances ability to incur
additional indebtedness and (4) Williams Partners Finances ability to engage in any business not
related to obtaining money or arranging financing for us or our other subsidiaries. We use the
equity method of accounting for our investments in Discovery and Four Corners, and neither will be
classified as our subsidiary under the indenture so long as we continue to own a minority interest
in such entity. As a result, neither Discovery nor Four Corners will be subject to the restrictive
covenants in the indenture. The indenture also contains customary events of default, upon which
the trustee or the holders of the senior notes may declare all outstanding senior notes to be due
and payable immediately. Pursuant to the indenture, we may issue additional notes from time to
time.
We may redeem the senior notes at our option in whole or in part at any time or from time to
time prior to June 15, 2011, at a redemption price per note equal to the sum of (1) the then
outstanding principal amount thereof, plus
31
(2) accrued and unpaid interest, if any, to the redemption date, plus (3) a specified make-whole
premium (as defined in the indenture). Additionally, upon a change of control (as defined in the
indenture), each holder of the senior notes will have the right to require us to repurchase all or
any part of such holders senior notes at a price equal to 101 percent of the principal amount of
the senior notes plus accrued and unpaid interest.
In connection with the issuance of the senior notes, we entered into a registration rights
agreement with the initial purchasers of the senior notes whereby we agreed to conduct a registered
exchange offer of exchange notes in exchange for the senior notes or cause to become effective a
shelf registration statement providing for resale of the senior notes. If we fail to comply with
certain obligations under the registration rights agreement, we will be required to pay liquidated
damages in the form of additional cash interest to the holders of the senior notes.
Capital Requirements
The natural gas gathering, treating, processing and transportation, and NGL fractionation and
storage businesses are capital-intensive, requiring investment to upgrade or enhance existing
operations and comply with safety and environmental regulations. The capital requirements of these
businesses consist primarily of:
|
|
|
Maintenance capital expenditures, which are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing operating capacity
of our assets and to extend their useful lives; and |
|
|
|
|
Expansion capital expenditures such as those to acquire additional assets to grow our
business, to expand and upgrade plant or pipeline capacity and to construct new plants,
pipelines and storage facilities. |
We estimate that maintenance capital expenditures for the Conway assets will be approximately
$6.8 million for 2006. Of this amount, $4.0 million has been spent through September 30, 2006, of
which approximately $0.8 million has been reimbursed by Williams subject to an omnibus agreement.
We expect to fund the remainder of these expenditures through cash flows from operations. These
expenditures relate primarily to cavern workovers and wellhead modifications necessary to comply
with KDHE regulations.
We currently estimate that we will incur $3.4 million to $4.6 million of maintenance
expenditures for Carbonate Trend during 2006 and 2007 for restoration activities related to the
partial erosion of the pipeline overburden caused by Hurricane Ivan in September 2004. We will
fund these repairs with cash flows from operations and then seek reimbursement from insurance.
We estimate that maintenance capital expenditures for 100 percent of Four Corners will be
approximately $19.6 million for 2006. Of this amount, $16.4 million has been spent through
September 30, 2006. We expect Four Corners will fund its maintenance capital expenditures through
its cash flows from operations. These expenditures relate primarily to well connections necessary
to connect new sources of throughput for the Four Corners system.
We estimate that expansion capital expenditures for 100 percent of Four Corners will be
approximately $8.1 million for 2006. Of this amount $0.6 million has been spent through September
30, 2006. We expect Four Corners will fund its expansion capital expenditures through its cash
flows from operations. These expenditures include $3.0 million for certain well connections that
will likely produce an overall increase in throughput volumes in 2007.
We estimate that maintenance capital expenditures for 100 percent of Discovery will be
approximately $4.3 million for 2006. Of this amount $1.3 million has been spent through September
30, 2006. We expect Discovery will fund its maintenance capital expenditures through its cash
flows from operations. These maintenance capital expenditures relate to numerous smaller projects.
We estimate that expansion capital expenditures for 100 percent of Discovery will be
approximately $42.7 million for 2006. Of this amount $22.3 million has been spent through
September 30, 2006. These expenditures are primarily for the ongoing construction of the Tahiti
pipeline lateral expansion project. Discovery will fund these expenditures with amounts previously
escrowed for this project.
32
Working Capital Attributable to Deferred Revenues
We require cash in order to continue providing services to our storage customers who prepay
their annual storage contracts in April of each year. The storage year for a majority of customer
contracts at our Conway storage facility runs from April 1 of a year to March 31 of the following
year. For most of these agreements, we receive payment for these one-year contracts in advance in
April after the beginning of the storage year and recognize the associated revenue over the course
of the storage year. As of September 30, 2006, our deferred storage revenue is $6.8 million.
Cash Distributions to Unitholders
We paid quarterly distributions to common and subordinated unitholders and the general partner
interest after every quarter since our IPO on August 23, 2005. We intend to make a quarterly
distribution of $10.1 million on November 14, 2006 to the general partner interest and common and
subordinated unitholders of record at the close of business on November 6, 2006. This distribution
will include an additional payment to the general partner of approximately $198,406 of incentive
distributions.
Results of Operations Cash Flows
Williams Partners L.P.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
(Thousands) |
Net cash provided by operating activities |
|
$ |
28,309 |
|
|
$ |
7,277 |
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
$ |
(160,138 |
) |
|
$ |
(26,260 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
157,140 |
|
|
$ |
33,465 |
|
The $21.0 million increase in net cash provided by operating activities for the first nine
months of 2006 as compared to the first nine months of 2005 is due primarily to:
|
|
|
$12.0 million increase in distributed earnings from Discovery; |
|
|
|
|
$9.7 million increase in distributed earnings from Four Corners; and |
|
|
|
|
$3.9 million net lower interest from the forgiveness of the advances from Williams in
conjunction with the closing of our IPO on August 23, 2005 offset by interest on our $150
million senior unsecured notes issued to finance a portion of our acquisition of a 25.1
percent interest in Four Corners. |
These increases in net cash provided by operating activities were partially offset by a $5.3
million increase in cash used for working capital.
Net cash used by investing activities includes the purchase of our 25.1 percent interest in
Four Corners on June 20, 2006. Because Four Corners was an affiliate of Williams at the time of
the acquisition, the transaction was between entities under common control, and has been accounted
for at historical cost. Therefore the amount reflected as cash used by investing activities for
this purchase represents the historical cost of the investment to Williams. Investing activities
in 2005 includes our $24.4 million capital contribution to Discovery for the construction of the
Tahiti pipeline lateral expansion project. Additionally, net cash used by investing activities
includes maintenance capital expenditures in our NGL Services segment primarily for the
installation of cavern liners and KDHE-related cavern compliance with the installation of wellhead
control equipment and well meters.
33
Net cash provided by financing activities in 2006 includes:
|
|
|
$172.7 million in net cash flows from transactions related to our acquisition of a 25.1
percent interest in Four Corners; |
|
|
|
|
$19.9 million of distributions paid to unitholders; and |
|
|
|
|
$4.2 million in indemnifications and reimbursements received from Williams pursuant to
the omnibus agreement. |
Net cash provided by financing activities in the first nine months of 2005 represent net cash
flows related to our IPO on August 23, 2005. These consisted of $100.2 million in net proceeds
from the sale of units, a $58.8 million distribution to Williams and the payment of $4.3 million in
expenses associated with our IPO. In addition, 2005 includes $3.7 million passed through to
Williams, prior to the IPO on August 23, 2005, under its cash management program.
Four Corners and Discovery
As previously disclosed, cash distributions from Four Corners and Discovery will be a
significant source of our liquidity. Due to the significance of Four Corners and Discoverys cash
flows to our ability to make cash distributions, the following discussion addresses in greater
detail the cash flow activities for 100 percent of Four Corners and Discovery for the nine months
ended September 30, 2006 and 2005.
Four Corners 100 percent
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
106,940 |
|
|
$ |
86,833 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
29,801 |
|
|
|
29,107 |
|
Gain on sale of equipment |
|
|
(2,622 |
) |
|
|
|
|
Cash used by changes in assets and liabilities |
|
|
(34,380 |
) |
|
|
(9,393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
99,739 |
|
|
|
106,547 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(17,506 |
) |
|
|
(13,301 |
) |
Proceeds from sales of equipment |
|
|
7,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(10,207 |
) |
|
|
(13,301 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Distributions to Williams under cash management program |
|
|
(44,865 |
) |
|
|
(93,246 |
) |
Distributions to members |
|
|
(38,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(83,551 |
) |
|
|
(93,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
5,981 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities decreased $6.8 million in 2006 as compared to 2005
due to a $25.0 million increase in cash used for working capital, partially offset by an $18.2
million increase in operating income, adjusted for non-cash items. The increase in cash used for
working capital was caused primarily by a $16.1 million
34
increase in affiliate receivables as a result of our transition from Williams cash management
program to a stand-alone cash management program and an increase of $6.8 million for accounts
receivable due from affiliate for reimbursable compression projects.
Net cash used by investing activities decreased $3.1 million in 2006 as compared to 2005 due
to $7.3 million of proceeds received from the sale of the LaMaquina treating facility in the first
quarter of 2006, partially offset by $4.2 million higher capital expenditures in 2006 related
primarily to capital expenditures for well connections.
Net cash used by financing activities decreased by $9.7 million in 2006 as compared to 2005
due to $48.4 million lower net cash flows passed through to Williams under its cash management
program, largely offset by $38.7 million in cash distributions to members. Four Corners
participation in Williams cash management program ceased, effective June 20, 2006, when we
acquired our 25.1 percent membership interest. Beginning in the third quarter of 2006, in
accordance with its amended limited liability company agreement, Four Corners began regular
distributions of its available cash.
Discovery 100 percent
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
25,458 |
|
|
$ |
7,424 |
|
Adjustments to reconcile to cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
19,133 |
|
|
|
18,366 |
|
Cash provided (used) by changes in assets and liabilities |
|
|
(5,657 |
) |
|
|
3,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
38,934 |
|
|
|
28,884 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(23,549 |
) |
|
|
(9,327 |
) |
Change in accounts payable capital expenditures |
|
|
285 |
|
|
|
(10,224 |
) |
(Increase) decrease in restricted cash |
|
|
13,778 |
|
|
|
(45,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(9,486 |
) |
|
|
(65,052 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Contributions from members |
|
|
8,989 |
|
|
|
48,303 |
|
Distributions to members |
|
|
(32,598 |
) |
|
|
(43,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(23,609 |
) |
|
|
4,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
5,839 |
|
|
$ |
(31,629 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities increased $10.1 million in 2006 as compared to 2005
due primarily to an $18.8 million increase in operating income, adjusted for non-cash expenses,
partially offset by an $8.7 million decrease in cash from changes in working capital due primarily
to a $7.0 million hurricane-related insurance receivable at September 30, 2006.
Capital expenditures in 2006 related primarily to the Tahiti pipeline lateral expansion
project, which were funded from amounts previously escrowed in 2005 and included on the balance
sheet as restricted cash. The $13.8 million decrease in 2006 restricted cash is the amount used
for this project from the funds previously escrowed. Capital expenditures in 2005 related
primarily to the completion of the Front Runner and market expansion projects as well as the
purchase of leased compressors at the Larose processing plant.
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Net cash used by financing activities in 2006 includes:
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$32.6 million of distributions paid to members, including three quarterly distributions
totaling $30.0 million; and |
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$9.0 million of capital contributions from members other than us for the construction of
the Tahiti pipeline lateral expansion. |
Net cash provided by financing activities in 2005 includes capital contributions from Discoverys
members for the construction of the Tahiti pipeline lateral expansion and the distribution of cash
retained from Discoverys operations prior to our IPO.
Contractual Obligations
On June 20, 2006, we issued $150.0 million aggregate principal of 7.5 percent senior unsecured
notes in a private debt placement. The maturity date of the notes is June 15, 2011. Interest is
payable semi-annually in arrears on June 15 and December 15 of each year, with the first payment
due on December 15, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. The
principal market risk to which we are exposed is commodity price risk for natural gas and NGLs.
Interest Rate Risk
Our long-term senior unsecured notes have a fixed 7.5 percent interest rate. Any borrowings
under our credit agreements would be at a variable interest rate and would expose us to the risk of
increasing interest rates. As of September 30, 2006 we did not have borrowings outstanding under
our credit agreements.
Commodity Price Risk
Certain of Four Corners and Discoverys processing contracts are exposed to the impact of
price fluctuations in the commodity markets, including the correlation between natural gas and NGL
prices. In addition, price fluctuations in commodity markets could impact the demand for Four
Corners and Discoverys services in the future. Carbonate Trend and our fractionation and storage
operations are not directly affected by changing commodity prices except for product imbalances,
which are exposed to the impact of price fluctuation in NGL markets. Price fluctuations in
commodity markets could also impact the demand for storage and fractionation services in the
future. In connection with the IPO, Williams transferred to us a gas purchase contract for the
purchase of a portion of our fuel requirements at the Conway fractionator at a market price not to
exceed a specified level. This physical contract is intended to mitigate the fuel price risk under
one of our fractionation contracts which contains a cap on the per-unit fee that we can charge, at
times limiting our ability to pass through the full amount of increases in variable expenses to
that customer. This physical contract is a derivative. However, we elected to account for this
contract under the normal purchases exemption to the fair value accounting that would otherwise
apply. We, Four Corners, and Discovery do not currently use any other derivatives to manage the
risks associated with these price fluctuations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934)
(Disclosure Controls) was performed as of the end of the period covered by this report. This
evaluation was performed under the supervision and with the participation of our general partners
management, including our general partners chief executive officer and chief financial officer.
Based upon that evaluation, our general partners chief executive officer and chief financial
officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
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Our management, including our general partners chief executive officer and chief financial
officer, does not expect that our Disclosure Controls or our internal controls over financial
reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected. We monitor our
Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this
regard is that the Disclosure Controls and the Internal Controls will be modified as systems change
and conditions warrant.
Third-Quarter 2006 Changes in Internal Control Over Financial Reporting
There have been no changes during the third-quarter 2006 that have materially affected, or are
reasonably likely to materially affect, our Internal Controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information required for this item is provided in Note 7, Commitments and Contingencies,
included in the Notes to Consolidated Financial Statements included under Part I, Item 1, which
information is incorporated by reference into this item.
Item 1A. Risk Factors
Limited partner interests are inherently different from the capital stock of a corporation,
although many of the business risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. The following new or modified risk factors,
most of which relate to our recent acquisition of a 25.1 percent interest in Williams Four Corners
LLC and our recent issuance of $150.0 million aggregate principal amount of senior unsecured notes,
should be read in conjunction with the risk factors disclosed in Part I, Item 1A, Risk Factors,
in our annual report on Form 10-K for the year ended December 31, 2005. In addition to the
information contained elsewhere in this quarterly report, the following risk factors, along with
the risk factors contained in our annual report on Form 10-K for the year ended December 31, 2005,
should be carefully considered by each unitholder in evaluating an investment in us. If any of the
following risks or those risks included in our Form 10-K were actually to occur, our business,
results of operations and financial condition could be materially adversely affected. In that case,
we might not be able to pay distributions on our common units and the trading price of our common
units could decline and unitholders could lose all or part of their investment.
Risks Inherent in Our Business
We may not have sufficient cash from operations to enable us to pay the minimum quarterly
distribution following establishment of cash reserves and payment of fees and expenses, including
payments to our general partner.
We may not have sufficient available cash each quarter to pay the minimum quarterly
distribution. The amount of cash we can distribute on our common units principally depends upon the
amount of cash we generate from our operations, which will fluctuate from quarter to quarter based
on, among other things:
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the prices we obtain for our services; |
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the prices of, level of production of, and demand for, natural gas and NGLs; |
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the volumes of natural gas we gather, transport and process and the volumes of
NGLs we fractionate and store; |
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the level of our operating costs, including payments to our general partner; and |
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prevailing economic conditions. |
In addition, the actual amount of cash we will have available for distribution will depend on other
factors such as:
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the level of capital expenditures we make; |
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the restrictions contained in our and Williams debt agreements and our debt service requirements; |
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the cost of acquisitions, if any; |
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fluctuations in our working capital needs; |
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our ability to borrow for working capital or other purposes; |
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the amount, if any, of cash reserves established by our general partner; |
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the amount of cash that each of Discovery and Four Corners distributes to us; and |
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reimbursement payments to us by, and credits from, Williams under the omnibus agreement. |
Our unitholders should be aware that the amount of cash we have available for distribution
depends primarily on our cash flow, including cash reserves and working capital or other
borrowings, and not solely on profitability, which will be affected by non-cash items. As a result,
we may make cash distributions during periods when we record losses, and we may not make cash
distributions during periods when we record net income.
Because of the natural decline in production from existing wells and competitive factors, the
success of our gathering and transportation businesses depends on our ability to connect new
sources of natural gas supply, which is dependent on factors beyond our control. Any decrease in
supplies of natural gas could adversely affect our business and operating results.
Our and Discoverys pipelines receive natural gas directly from offshore producers. The Four
Corners gathering system receives natural gas directly from producers in the San Juan Basin. The
production from existing wells connected to these pipelines and the Four Corners gathering system
will naturally decline over time, which means that our cash flows associated with these wells will
also decline over time. We do not produce an aggregate reserve report on a regular basis or
regularly obtain or update independent reserve evaluations. The amount of natural gas reserves
underlying these wells may be less than we anticipate, and the rate at which production will
decline from these reserves may be greater than we anticipate. Accordingly, to maintain or increase
throughput levels on these pipelines and the utilization rate of Discoverys natural gas processing
plant and fractionator and Four Corners processing plants and treating plants, we, Discovery and
Four Corners must continually connect new supplies of natural gas. The primary factors affecting
our ability to connect new supplies of natural gas and attract new customers to our pipelines
include: (1) the level of successful drilling activity near these pipelines; (2) our ability to
compete for volumes from successful new wells and existing wells connected to third parties; and
(3) our, Discoverys and Four Corners ability to successfully complete lateral expansion projects
to connect to new wells.
Neither we nor Four Corners has any current significant lateral expansion projects planned and
Discovery has only one currently planned significant lateral expansion project. Discovery signed
definitive agreements with Chevron, Shell and Statoil to construct an approximate 35-mile gathering
pipeline lateral to connect Discoverys
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existing pipeline system to these producers production facilities for the Tahiti prospect in the
deepwater region of the Gulf of Mexico. Initial production is expected in April 2008.
The level of drilling activity in the fields served by our and Discoverys pipelines and Four
Corners gathering system is dependent on economic and business factors beyond our control. The
primary factors that impact drilling decisions are oil and natural gas prices. A sustained decline
in oil and natural gas prices could result in a decrease in exploration and development activities
in these fields, which would lead to reduced throughput levels on our pipelines and gathering
system. Other factors that impact production decisions include producers capital budget
limitations, the ability of producers to obtain necessary drilling and other governmental permits,
the availability of qualified personnel and equipment, the quality of drilling prospects in the
area and regulatory changes. Because of these factors, even if new oil or natural gas reserves are
discovered in areas served by our pipelines and gathering system, producers may choose not to
develop those reserves. If we were not able to connect new supplies of natural gas to replace the
natural decline in volumes from existing wells, due to reductions in drilling activity,
competition, or difficulties in completing lateral expansion projects to connect to new supplies of
natural gas, throughput on our pipelines and gathering system and the utilization rates of
Discoverys natural gas processing plant and fractionator and Four Corners processing plants and
treating plants would decline, which could have a material adverse effect on our business, results
of operations, financial condition and ability to make cash distributions to our unitholders.
Lower natural gas and oil prices could adversely affect our fractionation and storage businesses.
Lower natural gas and oil prices could result in a decline in the production of natural gas
and NGLs resulting in reduced throughput on our pipelines and Four Corners gathering system. Any
such decline would reduce the amount of NGLs we fractionate and store, which could have a material
adverse effect on our business, results of operations, financial condition and our ability to make
cash distributions to our unitholders.
In general terms, the prices of natural gas, NGLs and other hydrocarbon products fluctuate in
response to changes in supply, changes in demand, market uncertainty and a variety of additional
factors that are impossible to control. These factors include:
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worldwide economic conditions; |
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weather conditions and seasonal trends; |
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the levels of domestic production and consumer demand; |
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the availability of imported natural gas and NGLs; |
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the availability of transportation systems with adequate capacity; |
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the price and availability of alternative fuels; |
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the effect of energy conservation measures; |
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the nature and extent of governmental regulation and taxation; and |
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the anticipated future prices of natural gas, NGLs and other commodities. |
Our processing, fractionation and storage businesses could be affected by any decrease in NGL
prices or a change in NGL prices relative to the price of natural gas.
Lower NGL prices would reduce the revenues we generate from the sale of NGLs for our own
account. Under certain gas processing contracts, referred to as percent-of-liquids and keep
whole contracts, Discovery and Four Corners both receive NGLs removed from the natural gas stream
during processing. Discovery and Four Corners can then choose to either fractionate and sell the
NGLs or to sell the NGLs directly. In addition, product optimization at our Conway fractionator
generally leaves us with excess propane, an NGL, which we sell. We also
sell excess storage volumes resulting from measurement variances at our Conway storage facilities.
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The relationship between natural gas prices and NGL prices may also affect our profitability.
When natural gas prices are low relative to NGL prices, it is more profitable for Discovery, Four
Corners and their customers to process natural gas. When natural gas prices are high relative to
NGL prices, it is less profitable to process natural gas both because of the higher value of
natural gas and of the increased cost (principally that of natural gas as a feedstock and a fuel)
of separating the mixed NGLs from the natural gas. As a result, Discovery and Four Corners may
experience periods in which higher natural gas prices reduce the volumes of NGLs removed at their
processing plants, which would reduce their margins. Finally, higher natural gas prices relative to
NGL prices could also reduce volumes of gas processed generally, reducing the volumes of mixed NGLs
available for fractionation.
We depend on certain key customers and producers for a significant portion of our revenues and
supply of natural gas and NGLs. The loss of any of these key customers or producers could result in
a decline in our revenues and cash available to pay distributions.
We rely on a limited number of customers for a significant portion of our revenues. Our three
largest customers for the year ended December 31, 2005, other than a subsidiary of Williams that
markets NGLs for Conway, were BP Products North America, Inc., SemStream, L.P. and Enterprise
Products Partners, all customers of our Conway facilities. These customers accounted for
approximately 45 percent of our revenues for the year ended December 31, 2005. Four Corners three
largest customers for the year ended December 31, 2005, other than a subsidiary of Williams that
markets NGLs for Four Corners and Williams Production Company, LLC, were ConocoPhillips, Burlington
Resources and BP America Production Company, which accounted for approximately 30 percent of Four
Corners revenues for the year ended December 31, 2005. On March 31, 2006, ConocoPhillips acquired
Burlington Resources.
In addition, although some of these customers are subject to long-term contracts, we may be
unable to negotiate extensions or replacements of these contracts, on favorable terms, if at all.
For example, Four Corners is in active negotiations with several customers to renew gathering,
processing and treating contracts that are in evergreen status and that represent approximately 14
percent of Four Corners revenues for the year ended December 31, 2005. The negotiations may not
result in any extended commitments from these customers. The loss of all or even a portion of the
volumes of natural gas or NGLs, as applicable, supplied by these customers, as a result of
competition or otherwise, could have a material adverse effect on our business, results of
operations, financial condition and our ability to make cash distributions to our unitholders,
unless we are able to acquire comparable volumes from other sources.
If third-party pipelines and other facilities interconnected to our pipelines and facilities become
unavailable to transport natural gas and NGLs or to treat natural gas, our revenues and cash
available to pay distributions could be adversely affected.
We depend upon third party pipelines and other facilities that provide delivery options to and
from our pipelines and facilities for the benefit of our customers. For example, MAPL delivers its
customers mixed NGLs to our Conway fractionator and provides access to multiple end markets for
NGL products of our storage customers. If MAPL were to become temporarily or permanently
unavailable for any reason, or if throughput were reduced because of testing, line repair, damage
to pipelines, reduced operating pressures, lack of capacity or other causes, our customers would be
unable to store or deliver NGL products and we would be unable to receive deliveries of mixed NGLs
at our Conway fractionator. This would have an immediate adverse impact on our ability to enter
into short-term storage contracts and our ability to fractionate sufficient volumes of mixed NGLs
at Conway.
MAPL also provides the only liquids pipeline access to multiple end markets for NGL products
that are recovered from Four Corners processing plants. If MAPL were to become temporarily or
permanently unavailable for any reason, or if throughput were reduced because of testing, line
repair, damage to pipelines, reduced operating pressures, lack of capacity or other causes, Four
Corners would be unable to deliver a substantial portion of the NGLs recovered at its processing
plants. This would have an immediate impact on Four Corners ability to sell or deliver NGL
products recovered at its processing plants. In addition, the five pipeline systems that move
natural gas to end markets from the San Juan Basin connect to Four Corners treating and processing
facilities, including the El Paso Natural Gas, Transwestern, Williams Northwest Pipeline, PNM and
Southern Trails systems. Some of these
natural gas pipeline systems have minimal excess capacity. If any of these pipeline systems were to
become
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temporarily or permanently unavailable for any reason, or if throughput were reduced because
of testing, line repair, damage to pipelines, reduced operating pressures, lack of capacity or
other causes, Four Corners customers would be unable to deliver natural gas to end markets. This
would reduce the volumes of natural gas processed or treated at Four Corners treating and
processing facilities. Either of such events could materially and adversely affect our business
results of operations, financial condition and ability to make distributions to our unitholders.
As another example, Shells Yellowhammer sour gas treating facility in Coden, Alabama is the
only sour gas treating facility currently connected to our Carbonate Trend pipeline. Natural gas
produced from the Carbonate Trend area must pass through a Shell-owned pipeline and Shells
Yellowhammer sour gas treating facility before delivery to end markets. If the Shell-owned pipeline
or the Yellowhammer facility were to become unavailable for current or future volumes of natural
gas delivered to it through the Carbonate Trend pipeline due to repairs, damages to the facility,
lack of capacity or any other reason, our Carbonate Trend customers would be unable to continue
shipping natural gas to end markets until either repairs are made to Yellowhammer or a new
interconnection is made with another treating facility. Since we generally receive revenues for
volumes shipped on the Carbonate Trend pipeline, this would reduce our revenues.
Any temporary or permanent interruption in operations at MAPL, Yellowhammer or any other third
party pipelines or facilities that would cause a material reduction in volumes transported on our
pipelines or our gathering systems or processed, fractionated, treated or stored at our facilities
could have a material adverse effect on our business, results of operations, financial condition
and our ability to make cash distributions to our unitholders.
Our future financial and operating flexibility may be adversely affected by restrictions in our
indenture and by our leverage.
In June 2006, we issued $150.0 million of senior unsecured notes in a private placement, which
caused our leverage to increase. Our total outstanding debt was $150.0 million as of September 30, 2006,
representing approximately 37 percent of our total book capitalization. Immediately prior to the
private debt placement of our senior unsecured notes, we had no outstanding debt.
Our debt service obligations and restrictive covenants in the indenture governing our
outstanding notes could have important consequences. For example, they could:
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make it more difficult for us to satisfy our obligations with respect to our outstanding notes and our
other indebtedness, which could in turn result in an event of default on such other indebtedness or
our outstanding notes; |
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impair our ability to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes; |
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adversely affect our ability to pay cash distributions to our unitholders; |
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diminish our ability to withstand a downturn in our business or the economy generally; |
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require us to dedicate a substantial portion of our cash flow from operations to debt service
payments, thereby reducing the availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes; |
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate; and |
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place us at a competitive disadvantage compared to our competitors that have proportionately less debt. |
Our ability to repay, extend or refinance our existing debt obligations and to obtain future
credit will depend primarily on our operating performance, which will be affected by general
economic, financial, competitive, legislative, regulatory, business and other factors, many of
which are beyond our control. If we are unable to meet
our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek
additional equity capital or sell assets. We may be unable to obtain financing or sell assets on
satisfactory terms, or at all.
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We are not prohibited under the indenture from incurring additional indebtedness. Our
incurrence of significant additional indebtedness would exacerbate the negative consequences
mentioned above, and could adversely affect our ability to repay our outstanding notes.
Neither Four Corners nor Discovery is prohibited from incurring indebtedness, which may affect our
ability to make distributions to our unitholders.
Neither Four Corners nor Discovery is prohibited by the terms of their respective limited
liability company agreements from incurring indebtedness. In June 2006, Four Corners entered into a
$20.0 million revolving credit facility with Williams as the lender. As of September 30, 2006, there were
no outstanding borrowings under the Four Corners revolving credit facility. If either Four Corners
or Discovery were to incur significant amounts of indebtedness, it may inhibit their ability to
make distributions to us. An inability by either Four Corners or Discovery to make distributions to
us would materially and adversely affect our ability to make distributions to our unitholders
because we expect distributions we receive from Discovery and Four Corners to represent a
significant portion of the cash we distribute to our unitholders.
We do not own all of the interests in the Conway fractionator, in Discovery or in Four Corners,
which could adversely affect our ability to operate and control these assets in a manner beneficial
to us.
Because we do not wholly own the Conway fractionator, Discovery or Four Corners, we may have
limited flexibility to control the operation of, dispose of, encumber or receive cash from these
assets. Any future disagreements with the other co-owners of these assets could adversely affect
our ability to respond to changing economic or industry conditions, which could have a material
adverse effect on our business, results of operations, financial condition and ability to make cash
distributions to our unitholders.
Discovery and Four Corners may reduce their cash distributions to us in some situations.
Discoverys limited liability company agreement provides that Discovery will distribute its
available cash to its members on a quarterly basis. Four Corners limited liability company
agreement provides that Four Corners will distribute its available cash to its members at least
quarterly. Both Discoverys and Four Corners available cash includes cash on hand less any
reserves that may be appropriate for operating its business. As a result, reserves established by
Discovery and Four Corners, including those for working capital, will reduce the amount of
available cash. The amount of Discoverys and Four Corners quarterly distributions, including the
amount of cash reserves not distributed, are to be determined by the members of their respective
management committees representing a majority-in-interest in such entity.
We own a 40 percent interest in Discovery and an affiliate of Williams owns a 20 percent
interest in Discovery. In addition, to the extent Discovery requires working capital in excess of
applicable reserves, the Williams member must make working capital advances to Discovery of up to
the amount of Discoverys two most recent prior quarterly distributions of available cash, but
Discovery must repay any such advances before it can make future distributions to its members. As a
result, the repayment of advances could reduce the amount of cash distributions we would otherwise
receive from Discovery. In addition, if the Williams member cannot advance working capital to
Discovery as described above, Discoverys business and financial condition may be adversely
affected.
We do not operate all of our assets. This reliance on others to operate our assets and to provide
other services could adversely affect our business and operating results.
Williams operates all of our assets, other than the Carbonate Trend pipeline, which is
operated by Chevron, and our Conway fractionator and storage facilities, which we operate. Williams
also operates the major plants and all of the plant compression for Four Corners, while Hanover
operates approximately 85 percent of Four Corners field compression. We have a limited ability to
control our operations or the associated costs of these operations. The success of these operations
is therefore dependent upon a number of factors that are outside our control, including the
competence and financial resources of the operators.
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We also rely on Williams for services necessary for us to be able to conduct our business.
Williams may outsource some or all of these services to third parties, and a failure of all or part
of Williams relationships with its outsourcing providers could lead to delays in or interruptions
of these services. Our reliance on Williams as an operator and on Williams outsourcing
relationships, our reliance on Chevron, Four Corners reliance on Hanover and Williams and our
limited ability to control certain costs could have a material adverse effect on our business,
results of operations, financial condition and ability to make cash distributions to our
unitholders.
Our industry is highly competitive, and increased competitive pressure could adversely affect our
business and operating results.
We compete with similar enterprises in our respective areas of operation. Some of our
competitors are large oil, natural gas and petrochemical companies that have greater financial
resources and access to supplies of natural gas and NGLs than we do.
Discovery competes with other natural gas gathering and transportation and processing
facilities and other NGL fractionation facilities located in south Louisiana, offshore in the Gulf
of Mexico and along the Gulf Coast, including the Manta Ray/Nautilus systems, the Trunkline
pipeline and the Venice Gathering System and the processing and fractionation facilities that are
connected to these pipelines.
Our Conway fractionation facility competes for volumes of mixed NGLs with fractionators
located in each of Hutchinson, Kansas, Medford, Oklahoma, and Bushton, Kansas owned by ONEOK
Partners, L.P., the other joint owners of the Conway fractionation facility and, to a lesser
extent, with fractionation facilities on the Gulf Coast. In April 2006, ONEOK, Inc. transferred its
entire gathering and processing, natural gas liquids, and pipelines and storage segments to ONEOK
Partners, L.P. (formerly known as Northern Border Partners, L.P.), or ONEOK. Our Conway storage
facilities compete with ONEOK-owned storage facilities in Bushton, Kansas and in Conway, Kansas, an
NCRA-owned facility in Conway, Kansas, a ONEOK-owned facility in Hutchinson, Kansas and an
Enterprise Products Partners-owned facility in Hutchinson, Kansas and, to a lesser extent, with
storage facilities on the Gulf Coast and in Canada.
Four Corners competes with other natural gas gathering, processing and treating facilities in
the San Juan Basin, including Enterprise, Red Cedar and TEPPCO. In addition, our customers who are
significant producers of gas or consumers of NGLs may develop their own gathering, processing,
fractionation and storage facilities in lieu of using ours.
Also, competitors may establish new connections with pipeline systems that would create
additional competition for services we provide to our customers. For example, other than the
producer gathering lines that connect to the Carbonate Trend pipeline, there are no other sour gas
pipelines near our Carbonate Trend pipeline, but the producers that are currently our customers
could construct or commission such pipelines in the future.
Our ability to renew or replace existing contracts with our customers at rates sufficient to
maintain current revenues and cash flows could be adversely affected by the activities of our
competitors. All of these competitive pressures could have a material adverse effect on our
business, results of operations, financial condition and ability to make cash distributions to our
unitholders.
The only pipeline that provides NGL transportation capacity in the San Juan Basin has filed at FERC
to increase certain of its tariff rates. If the requested increase is granted, Four Corners
operating costs would increase, which could have an adverse effect on our business and operating
results.
MAPL, the only pipeline in the San Juan Basin that provides NGL transportation capacity, has
filed at FERC to increase certain of its tariff rates. If FERC grants this request to increase
those tariff rates, we estimate that Four Corners cost of transporting NGLs to certain markets
would increase by approximately $1.5 million per year, which could have an adverse effect on our
business, results of operations, financial condition and ability to make cash distributions to us.
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Pipeline integrity programs and repairs may impose significant costs and liabilities on us.
In December 2003, the U.S. Department of Transportation issued a final rule requiring pipeline
operators to develop integrity management programs for gas transportation pipelines located where a
leak or rupture could do the most harm in high consequence areas. The final rule requires
operators to:
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perform ongoing assessments of pipeline integrity; |
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identify and characterize applicable threats to pipeline segments that
could impact a high consequence area; |
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improve data collection, integration and analysis; |
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repair and remediate the pipeline as necessary; and |
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implement preventive and mitigating actions. |
The final rule incorporates the requirements of the Pipeline Safety Improvement Act of 2002. The
final rule became effective on January 14, 2004. In response to this new Department of
Transportation rule, we have initiated pipeline integrity testing programs that are intended to
assess pipeline integrity. In addition, we have voluntarily initiated a testing program to assess
the integrity of the brine pipelines of our Conway storage facilities. In 2005, Conway replaced two
sections of brine systems at a cost of $0.2 million. This work is in anticipation of integrity
testing scheduled to begin in the third quarter of 2006. The results of these testing programs
could cause us to incur significant capital and operating expenditures in response to any repair,
remediation, preventative or mitigating actions that are determined to be necessary.
Additionally, the transportation of sour gas in our Carbonate Trend pipeline necessitates a
corrosion control program in order to protect the integrity of the pipeline and prolong its life.
Our corrosion control program may not be successful and the sour gas could compromise pipeline
integrity. Our inability to reduce corrosion on our Carbonate Trend pipeline to acceptable levels
could significantly reduce the service life of the pipeline and could have a material adverse
effect on our business, results of operations, financial condition and ability to make cash
distributions to our unitholders.
The State of New Mexico recently enacted rule changes that permit the pressure in gathering
pipelines to be reduced below atmospheric levels. In response to these rule changes, Four Corners
may reduce the pressures in its gathering lines below atmospheric levels. With Four Corners
concurrence, producers may also reduce pressures below atmospheric levels prior to delivery to Four
Corners. All of the gathering lines owned by Four Corners in the San Juan Basin are made of steel.
Reduced pressures below atmospheric levels may introduce increasing amounts of oxygen into those
pipelines, which could cause an acceleration of the corrosion.
We do not own all of the land on which our pipelines and facilities are located, which could
disrupt our operations.
We do not own all of the land on which our pipelines and facilities have been constructed, and
we are therefore subject to the possibility of increased costs to retain necessary land use. We
obtain the rights to construct and operate our pipelines and gathering systems on land owned by
third parties and governmental agencies for a specific period of time. For example, portions of the
Four Corners gathering system are located on Native American right-of-ways. Four Corners is
currently in discussions with the Jicarilla Apache Nation regarding rights-of-way that expire at
the end of 2006 for a small segment of the gathering system. Our loss of these rights, through our
inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our
business, results of operations and financial condition and our ability to make cash distributions
to our unitholders.
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Our operations are subject to governmental laws and regulations relating to the protection of the
environment, which may expose us to significant costs and liabilities.
The risk of substantial environmental costs and liabilities is inherent in natural gas
gathering, transportation and
processing, and in the fractionation and storage of NGLs, and we may incur substantial
environmental costs and liabilities in the performance of these types of operations. Our operations
are subject to stringent federal, state and local laws and regulations relating to protection of
the public and the environment. These laws include, for example:
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the Federal Clean Air Act and analogous state laws, which impose obligations related to air emissions; |
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the Federal Water Pollution Control Act of 1972, as renamed and amended as the Clean Water Act, or
CWA, and analogous state laws, which regulate discharge of wastewaters from our facilities to state
and federal waters; |
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the federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as
CERCLA or the Superfund law, and analogous state laws that regulate the cleanup of hazardous
substances that may have been released at properties currently or previously owned or operated by us
or locations to which we have sent wastes for disposal; and |
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the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous state laws that
impose requirements for the handling and discharge of solid and hazardous waste from our facilities. |
Various governmental authorities, including the U.S. Environmental Protection Agency, or EPA,
have the power to enforce compliance with these laws and regulations and the permits issued under
them, and violators are subject to administrative, civil and criminal penalties, including civil
fines, injunctions or both. Joint and several, strict liability may be incurred without regard to
fault under CERCLA, RCRA and analogous state laws for the remediation of contaminated areas.
There is inherent risk of the incurrence of environmental costs and liabilities in our
business due to our handling of the products we gather, transport, process, fractionate and store,
air emissions related to our operations, historical industry operations, waste disposal practices,
and the prior use of flow meters containing mercury, some of which may be material. Private
parties, including the owners of properties through which our pipeline and gathering systems pass,
may have the right to pursue legal actions to enforce compliance as well as to seek damages for
non-compliance with environmental laws and regulations or for personal injury or property damage
arising from our operations. Some sites we operate are located near current or former third party
hydrocarbon storage and processing operations and there is a risk that contamination has migrated
from those sites to ours. In addition, increasingly strict laws, regulations and enforcement
policies could significantly increase our compliance costs and the cost of any remediation that may
become necessary, some of which may be material.
For example, the Kansas Department of Health and Environment, or the KDHE, regulates the
storage of NGLs and natural gas in the state of Kansas. This agency also regulates the
construction, operation and closure of brine ponds associated with such storage facilities. In
response to a significant incident at a third party facility, the KDHE recently promulgated more
stringent regulations regarding safety and integrity of brine ponds and storage caverns. These
regulations are subject to interpretation and the costs associated with compliance with these
regulations could vary significantly depending upon the interpretation of these regulations.
Additionally, incidents similar to the incident at a third party facility that prompted the recent
KDHE regulations could prompt the issuance of even stricter regulations.
There is increasing pressure in New Mexico from environmental groups and area residents to
reduce the noise from midstream operations through regulatory means. If these groups are
successful, Four Corners may have to make capital expenditures to muffle noise from its facilities
or to ensure adequate barriers or distance to mitigate noise concerns.
Our insurance may not cover all environmental risks and costs or may not provide sufficient
coverage in the event an environmental claim is made against us. Our business may be adversely
affected by increased costs due to stricter pollution control requirements or liabilities resulting
from non-compliance with required operating or other
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regulatory permits. Also, new environmental
regulations might adversely affect our products and activities, including processing,
fractionation, storage and transportation, as well as waste management and air emissions. Federal
and state agencies also could impose additional safety requirements, any of which could affect our
profitability.
The natural gas gathering operations in the San Juan Basin may be subjected to regulation by the
state of New Mexico, which could negatively affect Four Corners.
The New Mexico state legislature has called for hearings to take place to examine the
regulation of natural gas gathering systems in the state. It is unclear when these hearings will
occur or if these hearings will occur at all, but they could result in gathering regulation that
would affect the fees that Four Corners could collect for gathering services. This type of
regulation could adversely impact Four Corners revenues and cash flow.
Risks Inherent in an Investment in Us
We have a holding company structure in which our subsidiaries conduct our operations and own our
operating assets, which may affect our ability to make payments on our outstanding notes and
distributions on our common units.
We have a holding company structure, and our subsidiaries conduct all of our operations and
own all of our operating assets. Williams Partners L.P. has no significant assets other than the
ownership interests in its subsidiaries. As a result, our ability to make required payments on our
outstanding notes and distributions on our common units depends on the performance of our
subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to make
distributions to us may be restricted by, among other things, applicable state partnership and
limited liability company laws and other laws and regulations. If we are unable to obtain the funds
necessary to pay the principal amount at maturity of our outstanding notes, or to repurchase our
outstanding notes upon the occurrence of a change of control, or make distributions on our common
units we may be required to adopt one or more alternatives, such as a refinancing of our
outstanding notes or borrowing funds to make distributions on our common units. We cannot assure
our notes holders that we would be able to refinance our outstanding notes or that we will be able
to borrow funds to make distributions on our common units.
Our common units have a limited trading history and a limited trading volume compared to other
units representing limited partner interests.
Our common units are traded publicly on the New York Stock Exchange under the symbol WPZ.
However, our common units have a limited trading history and daily trading volumes for our common
units are, and may continue to be, relatively small compared to many other units representing
limited partner interests quoted on the New York Stock Exchange.
The market price of our common units may also be influenced by many factors, some of which are
beyond our control, including:
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our quarterly distributions; |
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our quarterly or annual earnings or those of other companies in our industry; |
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loss of a large customer; |
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announcements by us or our competitors of significant contracts or acquisitions; |
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changes in accounting standards, policies, guidance, interpretations or principles; |
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general economic conditions; |
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the failure of securities analysts to cover our common units or changes in
financial estimates by analysts; |
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future sales of our common units; and |
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the other factors described in the Risk Factors set forth in our annual report
on Form 10-K for the year ended December 31, 2005 and our quarterly reports on
Form 10-Q. |
Item 6. Exhibits
The exhibits listed below are filed or furnished as part of this report:
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Exhibit |
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Number |
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Description |
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*#Exhibit 2.1
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Purchase and Sale Agreement, dated April 6, 2006, by and among Williams Energy
Services, LLC, Williams Field Services Group, LLC, Williams Field Services
Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams
Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7,
2006). |
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*Exhibit 3.1
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Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit
3.1 to Williams Partners L.P.s registration statement on Form S-1 (File No.
333-124517) filed with the SEC on May 2, 2005). |
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*Exhibit 3.2
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Amended and Restated Agreement of Limited Partnership of Williams Partners L.P.
(including form of common unit certificate), as amended by Amendments Nos. 1 and 2
(attached as Exhibit 4.2 to Williams Partners L.P.s registration statement on
Form S-3 (File No. 333-137562) filed with the SEC on September 22, 2006). |
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*Exhibit 10.1
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Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between
The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.7
to Williams Partners L.P.s quarterly report on Form 10-Q (File No. 001-32599)
filed with the SEC on August 8, 2006). |
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+Exhibit 31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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+Exhibit 31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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+Exhibit 32
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Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. |
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+ |
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Filed herewith. |
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* |
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Such exhibit has heretofore been filed with the SEC as part of the
filing indicated and is incorporated herein by reference. |
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# |
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Pursuant to item 601(b) (2) of Regulation S-K, the registrant
agrees to furnish supplementally a copy of any omitted exhibit or
schedule to the SEC upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WILLIAMS PARTNERS
L.P.
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(Registrant) |
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By: Williams Partners GP LLC, its general partner |
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/s/ Ted T. Timmermans |
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Ted. T. Timmermans |
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Controller (Duly Authorized Officer and Principal Accounting Officer) |
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November 2, 2006 |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
*#Exhibit 2.1
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Purchase and Sale Agreement, dated April 6, 2006, by and among Williams Energy
Services, LLC, Williams Field Services Group, LLC, Williams Field Services
Company, LLC, Williams Partners GP LLC, Williams Partners L.P. and Williams
Partners Operating LLC (attached as Exhibit 2.1 to Williams Partners L.P.s
current report on Form 8-K (File No. 001-32599) filed with the SEC on April 7,
2006). |
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*Exhibit 3.1
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Certificate of Limited Partnership of Williams Partners L.P. (attached as Exhibit
3.1 to Williams Partners L.P.s registration statement on Form S-1 (File No.
333-124517) filed with the SEC on May 2, 2005). |
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*Exhibit 3.2
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Amended and Restated Agreement of Limited Partnership of Williams Partners L.P.
(including form of common unit certificate), as amended by Amendments Nos. 1 and 2
(attached as Exhibit 4.2 to Williams Partners L.P.s registration statement on
Form S-3 (File No. 333-137562) filed with the SEC on September 22, 2006). |
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*Exhibit 10.1
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Amended and Restated Working Capital Loan Agreement, dated August 7, 2006, between
The Williams Companies, Inc. and Williams Partners L.P. (attached as Exhibit 10.7
to Williams Partners L.P.s quarterly report on Form 10-Q (File No. 001-32599)
filed with the SEC on August 8, 2006). |
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+Exhibit 31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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+Exhibit 31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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+Exhibit 32
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Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. |
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+ |
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Filed herewith. |
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* |
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Such exhibit has heretofore been filed with the SEC as part of the
filing indicated and is incorporated herein by reference. |
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# |
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Pursuant to item 601(b) (2) of Regulation S-K, the registrant
agrees to furnish supplementally a copy of any omitted exhibit or
schedule to the SEC upon request. |
49